As energy costs rise in Europe, question marks regarding the growth outlook are becoming apparent. The possibility of growth losing momentum makes it difficult for the European Central Bank (ECB) to maintain the balance between the goals of fighting inflation and supporting economic activity.
The bank, which increased the three main policy rates by 25 basis points in its meeting in September, is expected to remain cautious and keep the interest rates constant in this meeting. Market expectations are shaping up to be that the ECB may increase interest rates in December.
However, rising borrowing costs in European bond markets and political and financial uncertainties in France bring to the fore the possible effects of additional interest rate increases on economic growth.
On the other hand, annual inflation in the Eurozone increased to 3.8 percent in September this year due to the increase in energy prices. In addition, the Eurozone economy grew by 0.6 percent in the second quarter of this year compared to the previous quarter. The region's third-quarter growth data will be announced on Friday.
"Inflation is still at very high levels"
ING Group Chief Economist Peter Vanden Houte, in his assessment to AA correspondent on the subject, said, "Inflation is still at very high levels and may accelerate slightly in the coming months." he said.
At the same time, ECB President Christine Lagarde said, "Although growth remains resilient, long-term interest rates have risen significantly since our last meeting. This will slow down growth and reduce the impact of interest rates on inflation to a greater extent than envisaged in our September forecast," Houte said, adding that the recent turmoil in France has caused the bond interest rates to widen between countries facing serious financial problems, such as France, Belgium and Italy.
Houte predicted that the ECB would not increase interest rates this month and that the institution would wait until December to better evaluate economic developments.
Houte also stated that the bank will publish new economic forecasts in December and made the following evaluations:
"Although the possibility of the ECB increasing interest rates once again is not ruled out, a step in this direction is not expected to be taken this month. If the turmoil in the bond markets continues, the ECB may consider temporarily suspending the quantitative tightening process and flexibly reinvesting the amounts obtained from maturing bonds in its portfolio. Such a step could send a positive message to the bond markets."
"ECB has no reason to accelerate interest rate hikes"
Rabobank Senior Macrostrategist Bas van Geffen noted that the ECB has no reason to accelerate interest rate hikes.
Stating that although inflation remains the primary concern of the ECB, current conditions do not require an immediate interest rate increase, Geffen said, "Financial conditions have tightened somewhat with the effect of the turmoil in the French bond markets. This situation may lead the ECB to adopt a more dovish tone at the press conference." he said.
Emphasizing that the bond interest differences between countries are not at a level that requires intervention, Geffen stated that Lagarde may remind the ECB of the tools it can use to limit the possible spread of risks in the bond market.
Geffen said, "The ECB may consider increasing the required reserve ratio on the agenda, but the recent turmoil in the markets may prevent the ECB Governing Council from making such a change." he said.
"Interest rates will not remain constant for a long time"
Berenberg Chief Economist Holger Schmieding stated that the sharp rise in energy prices and the increasing risks originating from France put pressure on the ECB.
Schmieding stated that the ECB, faced with two different shocks at the same time, is expected to keep the interest rates constant and predicted that the interest rates will not remain constant for a long time.
Schmieding made the following evaluations:
"The ECB has already taken action twice by increasing the policy rate by 25 basis points in June and September in response to rising energy prices. The fact that the headline inflation increased to 3.8 percent on an annual basis in September and reached the highest level in the last three years indicates that the bank may increase interest rates again in the near future. In this context, after leaving the interest rates constant on October 29, the ECB will increase the interest rate once again at the December 17 meeting, where it will announce new expert projections on growth and inflation. "It is considered the most likely scenario. Although financial risks originating from France come to the fore, we do not expect the ECB to make any change in the pace of balance sheet reduction."
