by Prerana Bhat

BANGALORE (Reuters) – The European Central Bank (ECB) will raise its key rates by a quarter of a point on July 27, according to all economists polled by Reuters, a slight majority of whom now expect a further hike in September.

While inflation in the euro zone has almost halved, from 10.6% last October to 5.5% in June, the ECB continues to believe that it “could remain too high for too long” and that it “still has some way to go”.

Investors and analysts, meanwhile, are looking to determine how many more rate hikes and how long they will stay high until the end of the ECB’s monetary tightening cycle. The issuing institution has already carried out an unprecedented increase in the euro zone in the cost of credit by 400 basis points since July 2022 in order to bring inflation back towards the 2% target.

ECB officials have hinted that a ninth consecutive rate hike in July is all but a given, bolstering the view of 75 respondents to the July 14-19 Reuters poll that it will take place.

On the other hand, the continuation of monetary tightening beyond this deadline arouses less unanimity. Of those polled, 35 do not expect further rate hikes after July, while 40 economists foresee an additional 25 basis point hike in September, four more than in the June survey.

The ECB’s deposit rate would then reach 4%, its highest level since the introduction of this monetary policy instrument in 1999.

“(The rise in) July is pretty much a given,[ECB]officials have made it known that the central bank will raise interest rates and it will come as no surprise to anyone. The question is whether it will have to rise in September or not,” said Bas van Geffen, macroeconomic strategist at Rabobank.

“For the next meeting, the communication will be the most difficult part… a hold or a raise, they (ECB officials) will probably keep their options open. The decision will be close either way,” he added.

Overall restrictive statements from ECB officials have dimmed the prospect of an upcoming interest rate cut. More than 90% of respondents, or 55 out of 61 economists, do not foresee any reduction before at least the end of the first quarter of 2024.

Slightly more than half of respondents anticipate one or more ECB rate cuts by the end of March.

By contrast, the US Federal Reserve (Fed), which meets on July 26, a day before the ECB, is expected to make a final rate hike next week, according to money market forecasts.

The decorrelation of interest rate expectations on both sides of the Atlantic has partly stimulated the euro, which has appreciated by around 5% against the dollar since the start of the year.

A stronger currency is helping to put downward pressure on prices through cheaper imports, but inflation is not expected to hit target until at least 2025, according to ECB projections.

Core inflation, which excludes perceived volatile food and energy prices, is expected to ease slightly below its current level of 6.8% by the end of the year, 20 of 32 respondents said in a supplementary question. Only 12 people expect core inflation to pull back significantly.

Wage inflation will be the most sensitive component of core inflation, according to 24 of the 26 economists surveyed. The unemployment rate, meanwhile, is expected to barely rise, from 6.5% to 6.8% over the next two years, which could put additional pressure on wage claims.

However, demand slowed in the eurozone, with the currency bloc even entering recession, mainly due to Germany, the Old Continent’s largest economy.

The euro zone is expected to grow by 0.2% in the second, third and fourth quarters of this year and 1.0% on average in 2024, according to the survey.

“The latest data shows that eurozone growth is not picking up…Although not everything is down…moderate growth is the best we can hope for,” said Peter Vanden Houte, chief economist at ING.

(Reporting Prerana Bhat; investigations by Sujith Pai and AnittaSunil; Claude Chendjou, editing by Kate Entringer)

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