After a series of six rate hikes since July 2022, the ECB believes it still has some way to go before completing its monetary tightening cycle.

"This is not the time" to stop raising rates, warned at the end of April its chief economist Philip Lane.

The institution has raised rates by 3.50 percentage points since last July as part of an unprecedented campaign to tighten credit conditions to control soaring consumer prices.

Even the US central bank, which started its monetary tightening earlier than the euro's guardians, has not yet formally announced a pause.

The Fed on Wednesday raised its key interest rate for the tenth time in a row since March 2022, by a quarter of a percentage point, leaving open the rest of its policy.

On Thursday, the 26-member ECB's governing council will have a wealth of fresh data at their disposal to decide on the size of a further hike.

The key rate of the Fed © Samuel BARBOSA / AFP

A "majority" of them will feel "more comfortable with a lower rise in interest rates," according to Ulrike Kastens, an economist at DWS.

A majority of economists expect an increase of 0.25 percentage points, after 0.5 percentage points in March.

Gradual effect

The reference rate, by remunerating excess bank deposits dormant at the ECB counter, would in this case be raised from 3.0% to 3.25%.

By making credit more expensive, the ECB wants to curb the demand for mortgages, consumer loans or for business investment and thus slow down price increases.

Inflation in April still sailed well above the 2% target, regaining 0.1 percentage point, to 7.0%, after months of slowdown.

ECB President Christine Lagarde on March 16, 2023 in Frankfurt © Daniel ROLAND / AFP/Archives

But excluding energy, food, tobacco and alcohol prices, "core" inflation fell for the first time in a year, to 5.6% from 5.7% in March, according to Eurostat.

A significant slowdown in inflation is not expected in the short term, given the wage increases granted in several sectors, such as in Germany for public service employees.

In the banking sector, lending conditions are tightening as not seen since the 2011 sovereign debt crisis and demand for credit is suffering, according to the latest ECB data.

Monetary tightening is gradually having its effect: "all these impacts will continue to spread in the economy gradually, it is not over," predicted Mr. Lane.

If the danger of a banking crisis present in March has receded, a sharp rise in rates could create new tensions.

Finally the weak growth of the euro zone's Gross Domestic Product, of 0.1% in the first quarter, attests to the slowdown desired by the ECB, but also to the vulnerability of the euro zone economy.

Towards a peak this summer

These data would justify a limited rate hike, but no pause yet: the ECB Council "will only consider ending the rate hike cycle" if the "downward trend in core inflation continues" and "we are still far from it", according to Fritzi Köhler-Geib, chief economist at KfW.

Economists expect a deposit rate to peak between 3.50% and 3.75% by the summer low.

Inflation in the euro © zone Sophie STUBER / AFP

"Once this +plateau+ is reached, interest rates should stabilise for a relatively long time," said Maxime Mura, portfolio manager at Swiss Life Asset Managers.

Another project is underway at the ECB, with the reduction, at an average rate of 15 billion euros per month since March, of the stock of public and private bonds acquired during years of low inflation.

The "hawks" at the ECB, supporters of a strict monetary policy, could "push (Thursday) for a faster pace of balance sheet reduction from the third quarter," said Frederik Ducrozet, chief economist at Pictet Wealth Management.

© 2023 AFP