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The European Central Bank is likely to have an easy time with its interest rate decision in the coming week: In the slipstream of the clearly foreseeable interest rate cut in the USA on September 18, Europe's monetary guardians are likely to make their second interest rate cut. They will also receive a tailwind from the latest inflation data in the eurozone, which is close to the ECB's 2% target in August.
However, this ease could soon come to an end, and ECB chief Christine Lagarde is well aware of this. Her most recent comment about not focusing on individual data points is already aimed at the fall, when the inflation rate in the eurozone is likely to pick up again - even if the price trend from month to month matches the ECB's target value as a result of negative base effects.
Although wage growth slowed noticeably in the second quarter, nominal hourly wages are currently still 3.8% higher than in the previous year. Prices for services rose by an average of more than 0.4% per month in the first seven months of the year - extrapolated over a year, this results in a price increase rate of more than 5%. If prices continue to rise, inflation could even be close to 3 percent again by the end of the year.
The ECB is therefore facing a stagflationary environment and thus a highly uncomfortable decision-making situation in the near future: the inflation trend actually requires interest rates to remain high. However, the persistently weak economic momentum in the eurozone could also support the argument that interest rate cuts will weaken the impact of restrictive monetary policy on the economy. Experience shows that there are advocates of both approaches in the ECB Governing Council, so controversial discussions are likely. It is difficult to predict who will ultimately prevail and what position Christine Lagarde will take. For financial markets and companies alike, this means an additional element of uncertainty. In any case, a rapid succession of further interest rate cuts is not automatically the most likely scenario that investors can prepare for.
