Next Thursday, the Governing Council of the European Central Bank (ECB) will meet in Athens in a meeting that will have its own symbolism as it is expected to keep interest rates steady for the first time after ten consecutive hikes since July 2022. , by a total of 450 basis points (4.5 percentage points).

The central bank had signaled since its September meeting that it would put the brakes on its aggressive monetary policy, noting that interest rates had reached a level which, if sustained long enough, would go a long way in bringing inflation back to its 2% target. .

Officially, the ECB has not declared an end to its policy tightening cycle, which it is likely to do after many months, when it has relative certainty that inflation will return to its 2% target in 2025 and can move on. with security in lowering interest rates. This is reasonable, as its prediction may be today that this goal will be reached, but the uncertainties are very large and no one can rule out deviations, which if significant or long-lasting could lead to a new increase in interest rates.

Eurozone inflation data in September confirmed the ECB’s forecasts for a steady deceleration in price increases. Eurostat’s harmonized index of consumer prices rose 4.3% from 5.2% in August, while so-called structural inflation – which excludes energy, food, alcohol and tobacco prices – recorded its first major fall in to 4.5% from 5.3%.

On the other hand, however, new uncertainty has been added by the war between Israel and Hamas, which could, in case it becomes generalized in the Middle East, lead to a new escalation in oil and natural gas prices, before closing its cycle energy crisis opened by the war in Ukraine.

If exogenous risks do not materialize, the ECB’s baseline scenario is not to raise interest rates, but to keep them at current levels until next spring or summer, when it is likely to announce its first rate cut.

Beyond the risk of exogenous shocks, another important uncertainty for the ECB is that of wage increases. According to Eurosystem data, workers’ wages in the Eurozone rose in the first half of this year by about 5.5% to cover some of the loss in purchasing power they had from autumn 2021, when the first wave of price increases began. .

Several ECB officials, including its chief economist Philip Lane, see wage rises likely to be considerably larger in 2024, which could make it difficult to bring inflation down to the 2% target as wages they are a significant cost factor for many businesses, especially those in the service sector.

For this reason, Lane said earlier this week that the ECB will not be able to have a firm estimate until spring 2024 – when figures for wage increases agreed to by sectoral or national labor contracts will be released. that inflation will drop to 2% in 2025.

In addition, Lane said that interest rates are not expected to return to the zero or negative levels that have been entrenched in the past decade, but are more likely to hover around 2% in the long run.