The European Central Bank’s decision to hike rates again on Thursday shows it will prioritise its price stability mandate even in a stagflationary environment of higher oil prices and slowing growth, though potential cuts could be discussed as soon as the December policy meeting, former ECB Chief Economist Peter Praet told MNI.
“The agreement in the Governing Council was, we send this signal - basically that the stagflation analysis was shared. So, what do you do - you hike and at the same time send a signal that it is probably the last one – but we look at the data and the door is a little open,” said Praet, a member of MNI’s Connect Advisory Board.
Markets however took the view that rates have already peaked, and Praet said that while rate cuts will not come before the middle of next year, the subject of cuts could come up as soon as December. (See MNI WATCH: ECB Hikes 25Bp, Signals Peak May Be Near)
WEAKENING ECONOMY
“Basically they reinforced the market view that rates have peaked and that there is an inflection point despite Lagarde’s statement that rates have reached levels that – ‘if maintained for a sufficient duration will make a substantial contribution’ etcetera,” Praet said.
The ECB’s seeming optimism on a 2024 recovery despite today’s rate hike may be unconvincing to markets, Praet said, pointing to another factor likely to reinforce views that cuts could come by the middle of next year.