The ECB is preparing to tighten policy in September

According to the ECB’s chief economist, Philip Lane, inflation in the eurozone is set to remain above the 2 per cent target in the coming period. “I would say that for the rest of the year, inflation is likely to remain around this 3 per cent level,” he told Irish broadcaster RTE yesterday, commenting on the macroeconomic trends on the basis of which the Governing Council of the European Central Bank will be called upon to take a decision on interest rates on 10 September. “But a great deal depends on whether a solution to the crisis in the Middle East can be found. It is a truly uncertain situation. We are not yet at 10 per cent of 2022, but we are still above our target,” Lane continued. The most likely outcome, according to the markets, is expected to be a rate rise, following the ECB’s decision in July to leave rates unchanged, when eurozone inflation rose to 2.9 per cent (+0.1 compared with June) and following the previous month’s rise (the first since September 2023).

Lane then spoke of the next risk: “We believe that food inflation will be one of the factors driving the overall index over the course of the coming year”. Food inflation is currently relatively low, at 1.2 per cent. But weather events such as El Niño represent a significant economic variable, according to the chief economist: “They are likely to lead to further upward pressure” on inflation, with “effects most visible in the summer of 2027”. In any case, as President Christine Lagarde said at the Sintra Forum, the markets will have to do their own calculations, given that the ECB has officially abandoned “forward guidance”. As such, Lane did not give anything away regarding the next move, but he did defend the June rate rise: “It would be a false economy to avoid tightening interest rates because of the impact this has on mortgages.” Because the bill would come due anyway, but in the form of inflation that is “too high for too long”.