This week, the flow of statistical information on the current state of affairs in the eurozone economic system space will provide the European Central Bank with more signals and form by this institution a more accurate understanding of how appropriate it is to decide to continue taking actions within the framework of the monetary policy easing strategy in September.
In June, the mentioned financial regulator lowered the cost of borrowing for the first time in five years. It was a landmark decision, including in the global context. At that time, European Central Bank officials cut the record-high deposit rate by 25 basis points, to 3.75%. After that, further easing of the monetary policy of the European financial regulator belongs to the category of ambiguous prospects, the materialization of which is not guaranteed in the short term in the context of the specifics of the current economic situation.
Analysts interviewed by the media predict that the report, which will be published on Wednesday, July 31, will show that inflation in the eurozone is at around 2.5%. If this assumption is confirmed by reality, the dynamic of the growth in the cost of goods and services in the mentioned kind of financial region will demonstrate the absence of changes for the second month in a row. At the same time, the previous version of the forecast of analysts interviewed by the media provided that inflation in the eurozone as of the end of July would be fixed at 2.3%. Over time, the outlook has become more pessimistic. A slowing economic recovery does not favor positive expectations.
At the same time, the specified analysts are enthusiastic about the dynamic of the core measure of inflation. It is worth noting that this indicator does not include prices for such volatile items as food and energy. Analysts expect the core measure of inflation to be fixed at 2.8%, which means a decrease in the figure. In this case, it means the data that is predicted to be contained in the report scheduled for publication on Wednesday.
This month, the European Central Bank decided not to make any changes to its monetary policy strategy. This decision implies keeping interest rates at the same level. Officials of the European financial regulator, commenting on the mentioned result of the policy meeting, said that the prospects for lowering the cost of borrowing in September will depend on several circumstances shaping the economic situation in the eurozone. By then, the European Central Bank will have received more data on the dynamic inflationary process. Investors estimate the probability of lowering the cost of borrowing in September at 90%.
This week, data on the dynamic of economic growth in the second quarter of 2024 will be published. According to analysts interviewed by the media, the mentioned data may indicate that the economic recovery in the eurozone after several months of stagnation is showing a degree of intensity that is below preliminary expectations.
According to the results of the second quarter of 2024, industrial output is expected to grow by 0.2% year-on-year in 20 countries of the mentioned zone. The corresponding point of view is shared by analysts interviewed by the media. It is worth noting that in the first quarter of 2024, the mentioned indicator grew by 0.3% year-on-year. The specified analysts predict that industrial output growth will slow down in eurozone countries such as Germany, Italy, and Spain.
The President of the European Central Bank, Christine Lagarde, this month stated the importance of the mentioned data in the context of decision-making regarding monetary policy strategy. She also noted that her staff will produce a new set of economic projections for the next decision on the cost of borrowing. Christine Lagarde said that by September, the European Central Bank will receive a lot of information about the state of affairs in the eurozone economy.
Many European officials are supporters of the standpoint that before deciding on making changes to the monetary policy concept of the local financial regulator, more data is needed, including the specifics of the dynamic of the inflationary process and the situation in the manufacturing sector.
Luis de Guindos, Vice President of the European Central Bank, says that from a data point of view, September is a much more convenient month for making decisions on interest rates. Governor of the National Bank of Slovakia Peter Kazimir suggested waiting for the much-anticipated September health check. He also says that the market’s bet on two more lowering of the cost of borrowing in the eurozone in the current year isn’t entirely misplaced, but shouldn’t be taken as a given or a baseline scenario. Peter Kazimir stated that inflation is returning to the target of 2%, but the corresponding result has not yet become a reality. According to him, due to various factors, including internal circumstances, and the state of affairs observed at the global level, there is still a non-negligible risk of renewed inflationary.
Not a single Governing Council member is scheduled to speak this week. For this reason, markets will rely only on their own opinions regarding the dynamic of inflation and the most likely actions of the European Central Bank in the relevant context.
Economist Ana Andrade says that the basic predictive scenario is that the data, which will be published before the September policy meeting of the European financial regulator, will form a platform for the next interest rate cutting. According to the expert, the favorable energy base effect should lead to the headline consumer price index in August being within reach of the European Central Bank’s target of 2%. Ana Andrade also expects that there will be more evidence of easing price pressures, both in terms of inflation in the service area and the dynamic of wages.
It is worth noting that last week the first data were released indicating a negative state of affairs in the economic system of the eurozone. The results of surveys of business representatives conducted by S&P Global show that output in the private sector probably did not grow in July. At the same time, the monthly Ifo survey indicates a deterioration in mood among German companies.
The current economic situation in the eurozone, the main components of which are ongoing price pressure and a weakening recovery, is a kind of challenge for the local financial regulator in the context of a change in monetary policy. At the same time, the European Central Bank will form a final assessment of the feasibility of cutting interest rates after receiving inflation data.
Currently, price growth in the service area continues to be the main indicator, since labor costs are a very important factor in this area of activity. European Central Bank Executive Board member Isabel Schnabel said the mentioned gauge was a central reason why the last mile is still proving difficult. According to her, the repeated increase in inflation in the service area is at least a reason for taking a closer look.
ING economist Carsten Brzeski says that services number remained stuck at 4.1% in June. Against this background, the mentioned indicator is becoming a focal point ahead of the September decision of the European Central Bank on the monetary policy strategy.
Carsten Brzeski reckons that the profile of the staff September inflation forecasts and actual services inflation data over the next two months will be the most important data to tilt the balance to either side.
Currently, the European Central Bank predicts that the growth in the cost of goods and services will reach the target in the last quarter of next year.
T. Rowe Price economist Tomasz Wieladek agrees that price pressures in the services area may eventually become a major factor in the context of monetary policy decisions in the eurozone. According to the expert, positive economic data before September may signal a decrease in inflation and an argument in favor of lowering borrowing. Tomasz Wieladek says that there would be a discussion about accelerating the pace of interest rate cuts or about a more significant scale of appropriate measures if economic growth indicators remain weak.
Also, in the context of the prospects for changing the monetary policy strategy of the European Central Bank, the dynamic of the wage is a very important issue. The slowdown of this indicator to more sustainable levels is considered by experts as a prerequisite for the return of inflation to the target. In the relevant context, greater clarity will be formed after the European financial regulator publishes its figure on negotiated pay and Eurostat release on compensation per employee.
Officials will probably look at more forward-looking indicators like their own wage trackers to be certain that the anticipated decrease will materialize.
Tomasz Wieladek says that wage information will be a little less important in the summer.
It is worth noting that in the era of globalization, what can be described as the interconnectedness of central bank decisions has intensified. This means that as national economies converge in the context of international supply chains, imports, and exports, the state of affairs in a particular relevant system has a certain degree of impact on the situation in other such systems. The European Central Bank, as part of its monetary policy, will have to pay attention to the actions of financial regulators in other countries. For example, the Federal Reserve and the Bank of England take a very cautious approach to the issue of potential interest rate cuts and refuse to take quick decisions on the relevant issue. The fact that the European Central Bank lowered borrowing costs in June, but faces significant challenges in the context of the prospects for continued monetary policy easing, is partly due to the interconnectedness of financial regulators’ decisions against the backdrop of globalization.
