By Balazs Koranyi
JACKSON HOLE, Wyoming (Reuters) – European Central Bank policymakers are increasingly concerned about deteriorating growth prospects and, while the debate is still open, momentum for a pause in its rate hikes is building, eight sources with direct knowledge of the discussion said.
The ECB has raised rates at each of its past nine meetings to tame prices, most recently on July 27, when it left its options open for its next meeting in September, with policymakers divided between a pause and tightening further.
Conversations with eight policymakers in Europe and on the sidelines of the U.S. Federal Reserve’s Jackson Hole symposium suggest the “pause” camp is now growing, after major economic indicators in the past six weeks came in below expectations, suggesting that a recession is now a distinct possibility.
“The number of voices advocating a pause is multiplying as the data roll in,” said one of the sources, who asked not to be named.
Several of the sources said they saw chances evenly split between a hike and a pause, while a smaller number saw a pause as more likely. But none said they saw a hike as the most likely outcome, even if that was their preference.
That marks a distinct shift from six weeks ago when a hike was still seen as most likely in September.
An ECB spokesperson declined to comment.
JOB NOT DONE
All the sources agreed, however, that even in case of a pause, the ECB would need to make clear its job was not done and that more policy tightening could still be needed.
They said it could take months, perhaps until early 2024, to be confident that euro zone inflation, now at 5.3%, was heading towards the central bank’s 2% target.
The sources also agreed that the debate remains open and nothing would be settled until after the next inflation reading on Aug. 31 and the ECB’s own new economic projections.
The ECB will next meet on Sept. 14.
Markets currently see an even split between chances of a hike in September and a pause but expect the ECB to make a final 25 basis point hike to 4% at some point later this year.
Arguments for a pause centre on growing recession fears, the rapid deterioration of China’s growth outlook, benign wage growth readings and arguments that past ECB hikes are increasingly working their way through the economy.
Manufacturing has been in recession for much of this year but now even services, the engine of euro zone growth, have started to soften, as shown by this week’s Purchasing Managers’ Index (PMI) for August, which came in below expectations.
Some policymakers cautioned against reading too much into such surveys because there has been a growing gap between hard data and sentiment readings, with actual data coming in better than gloomier surveys have suggested.
“Firms are indicating a recession but they’re not behaving like there is a recession; they keep on hiring workers,” one of the sources said.
Employment has continued to grow and the jobless rate is at an all-time low, suggesting the labour market is hot. This is a paradox since historically, significant disinflation has always come with a rise in unemployment.
That could either mean the labour market is behaving differently than in the past or that disinflation will eventually hit a wall.
Advocates of a pause in rate hikes argue that negotiated wage growth is still relatively benign and indicates that workers are just trying to recoup earnings lost to years of high inflation.
Those who argue for more tightening meanwhile say that underlying inflation has just plateau-ed and a meaningful decline would be needed for the ECB to hit “pause”: they want solid evidence that inflation is heading back to target without risk of getting stuck above 2%.
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