ECB pause expectations weigh on euro

The European Central Bank has not yet decided what to do this month, but the end of its rate hike cycle is near.

Officials will meet on September 14 to decide whether the recent economic slowdown is reason enough to hold interest rates for the first time since the ECB’s historic tightening campaign began more than a year ago. Some have signaled they may support a new increase as inflation in the currency bloc hovers above 5%.

Whether officials decide to raise the deposit rate to 4% or not, it is more important to focus on the length of time that borrowing costs will remain at their peak.

Eurozone inflation data released on Thursday showed a key measure officials are focusing on slowed to 5.3% in August from 5.5% in the previous month – as expected. This has led investors to raise bets that interest rates will remain unchanged this month.

Underlying inflation, which removes volatile elements including energy, appears to be starting to reverse. This encouraging sign is still far from enough.

Officials will have new estimates for their decision this month. Policymakers have not yet drawn any conclusions on whether such a result would justify a new rate hike next month or a pause.

Overall, expectations for a softer tone from the ECB could keep the euro under pressure for some time and stimulate risk appetite in European stocks.