The European Central Bank is preparing for a hard stop as the economy turns south

  • Shoppers in the region are reluctant to spend because inflation eats up their disposable income.
  • While the manufacturing sector has witnessed a decline since approximately mid-2022.
  • More information about the ECB’s view on inflation and the growth path will be revealed in a new round of staff forecasts on Thursday.

Christine Lagarde, President of the European Central Bank.

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FRANKFURT – The European Central Bank is set to keep interest rates steady on Thursday as economic activity in the euro zone slows faster than previously expected.

Shoppers in the region are holding back on spending as inflation eats up their disposable income, while the manufacturing sector has been in decline since about mid-2022.

Economic theory suggests that these two factors would drag down inflation. But whether this is the case is still an open debate within the walls of the Frankfurt Foundation.

“While doves will argue that it is only a matter of time before weak growth leads to lower inflation, hawks are banking on part of weak growth arising from supply rather than demand,” said Paul Hollingsworth, chief economist at BNP Paribas. Recent research note.

“As a result, price pressures may be less sensitive to weaker growth than typically expected.”

The headline inflation rate for August was slightly higher than expected at 5.3%. But core inflation, which excludes energy and food and which the ECB closely monitors as a measure of underlying price pressures, fell in line with expectations to 5.3% as well, down from 5.5% the previous month.

More information on what the ECB thinks about inflation and the growth path will be revealed in a new round of staff forecasts on Thursday. The market expects revisions to both the ECB’s GDP and inflation expectations.

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“In light of recent data, staff are likely to review near-term growth forecasts,” Mark Wall, ECB monitor at Deutsche Bank, said in a research note.

“Tighter financial conditions and slower growth should translate into a lower level of core inflation by the end of the forecast horizon.”

The outlook is still very uncertain. This was confirmed by President Christine Lagarde in Jackson Hole last month, the Federal Reserve’s annual conference. The past few years have witnessed several shocks that have had lasting effects on the economic system and monetary policy transmission.

“We must form a vision for the future and act in a forward-looking way,” Lagarde said in her speech in Jackson Hole. “But we will only truly understand the effects of our decisions after the fact,” she added.

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