Lagarde's silence fuels the eurozone interest rate debate

Christine Lagarde's avoidance of a clear signal of intent on politics European Central Bank has just shed a brighter light on a crucial week in the eurozone.

Although the ECB president noted on Friday that inflation remained unbeaten, she did not address the outlook for the September 14 meeting, giving her colleagues the opportunity to publicly debate the need to increase borrowing costs as key data emerge in the coming days.

Which way will Lagarde go?

Consumer price data will set the stage for one of the most tense decisions since the ECB began to raise rates more than a year ago, as officials weigh in on whether additional monetary policy tightening is necessary or whether the deteriorating economic outlook is enough. gloomy that warrant a break. Inflation can tip the scales between a hike and a pause.

Those who attended the Federal Reserve conference in Jackson Hole with Lagarde heard the chairman's signal Fed Jerome Powell that the cost of borrowing in the US will remain high and may even increase.

What will the ECB do?

It seems that the rate hike in September remains on the knife's edge, but in the end the ECB, given the underlying inflation, will raise rates.

On the other hand, which is another illustration of the short-term nature of this decision, economists from Berenberg (a full-service international private and commercial bank headquartered in Hamburg, Germany) led by Holger Schmieding revised their forecasts on Friday, before Lagarde spoke, and put the likelihood of an interest rate hold at 60% versus 40% previously.

For all observers, Thursday's data on inflation in the euro zone will be of primary importance. The so-called base measure excluding volatile elements such as energy fell only slightly this month to 5,3% from 5,5% in July, according to a Bloomberg survey of economists.

Voices from the ECB

A key reason is that the service sector is more resilient than the struggling industry sector.

"Core inflation is still quite elevated, with no very clear downward trend" Martins Kazaks, a member of the Governing Council of Latvia, said on Friday.

"I would still lean towards raising interest rates" Kazak added.

His hawkish colleague Joachim Nagel, president of the Bundesbank, insisted that “there is still much to do”when it comes to restoring price stability i "it's way too early"to think about a pause.

Mario Centeno, head of Portugal's central bank and one of the ECB's more dovish officials, struck a different tone, stating that

“The downside risk we identified in our June forecast has materialized.”

The next data will be crucial

They spoke in the shadow of the Teton Mountain Range after a series of dire reports from purchasing directors released last week signaled an intensification of contraction in private sector activity in the eurozone, adding to the prospect of downward pressure on inflation.

"Most of the ECB speakers stressed that they are data-driven" said Schmieding from Berenberg on Sunday.

“If the real economy data shows a decline and August inflation does not surprise on the upside, it seems the ECB will leave interest rates unchanged in September.”

Poor PMI readings have prompted investors/traders to limit bets on a rate hike next month. Money markets continue to predict that European Central Bank policy makers will make a final move by the end of the year, but the likelihood of such an outcome has been reduced to around 80% compared to the full valuation earlier this month.