Reuters reported on Tuesday that according to a source with direct knowledge of the discussions among rate-setters, the European Central Bank expects inflation within the Eurozone to remain above 3% in 2024, increasing the likelihood there will be a tenth straight interest rate hike this week.
The ECB will begin its latest two day meeting Wednesday, as persistently high inflation is intersecting with fears of a recession and reduced industrial output, pulling regulators in opposing directions, and until Tuesday, splitting market expectations between a pause and another rate hike of 25 basis points.
Following the Reuters report, however, traders increased the number of bets on rates being hiked, driving up the euro and government bond yields.
On Wednesday, the ECB is set to release its quarterly projections to its Governing Council, which will place inflation over 3% for 2024, according to the source, which will work against the possibility of a small cut.
The revised 2024 projection comes in above the 2% target of the central bank and is higher than the 3% forecast in June. It also exceeds the 2.7% prediction produced by a Reuters poll of economists.
The source indicated the decision on an interest rate was still not finalized, and could go either way, with formal proposals not yet having been presented.
However a forecast for a 3% inflation rate in 2024 would increase the likelihood of a rate hike, and it indicates inflation may be proving stickier than policymakers had previously anticipated.
According to money market analyses, investors now assign a 70% chance of a rate hike this week. On Tuesday that figure was assessed at 40%.
The ECB’s deposit rate was raised to 3.75% from a starting point of negative 0.50 in 14 months, as the ECB pursued the fastest rate of tightening on record, seeking to stem a runaway inflation.
However both headline and underlying core inflation remain over 5%, which raises the risks that in a still-tight labor market, workers will continue to demand wage increases which will continue to feed a growing inflation.
In a Reuter’s poll, economists forecasted eurozone growth at 0.6% for 2023 and 0.9% in 2024.
