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Several of the ECB’s more hawkish rate setters believe rates could rise again in December if wages continue to grow rapidly and inflation becomes stickier than expected.

Investors generally expect the European Central Bank to raise interest rates on Thursday for the last time, with the deposit rate rising to 4%.

But three people involved in Thursday’s monetary policy meeting told the Financial Times that if euro zone inflation is higher than expected, the possibility of another rate hike when the central bank updates its forecasts in December remains open.

“I don’t think we’re quite done yet,” one policymaker said. “We would need a very negative (inflation) surprise to raise rates again in October, but we may get it in December.” Another said a 25 percentage point rise in December “is still a possibility — I wouldn’t rule it out.” possibility”.

The central bank said on Thursday that keeping interest rates at current levels “for a sufficient period of time” would make a significant contribution to the “timely return of inflation” to its 2% target. The comments stoked investor expectations that this would be its final rally.

“It’s clearer than I thought,” said Dirk Schumacher, a former ECB staffer now an economist at Natixis. “Inflation would have to rise significantly before they would raise rates again.”

However, policymakers highlighted uncertainty about how quickly price pressures will subside, especially as wage growth continues to accelerate across much of Europe – something ECB chief economist Philip Lane raised at this week’s meeting question.

Line chart showing euro zone inflation remains stubbornly above ECB target

Lane highlighted the recent agreement with Dutch unions to increase workers’ wages by at least 10%. The policymaker said he was briefed on the agreements by Dutch Central Bank Governor Claes Nott. The ECB and Nott declined to comment.

European Central Bank President Christine Lagarde Thursday said The contribution of labor costs to euro zone inflation increased in the three months to June.

In the second quarter, per capita wages in the Eurozone increased by 5.5% year-on-year, close to a record high. That helped push inflation in the services sector, where labor accounts for a large part of total costs, to 5.5% in August.

“A sustained rise in inflation expectations above our target, or higher than expected increases in wages or profit margins, could push inflation higher, including over the medium term,” Lagarde said, adding that she could not say interest rates had “peaked” .

But she also said there were early signs that companies were absorbing higher wage costs by compressing profit margins rather than raising prices.

The European Central Bank on Thursday raised its inflation forecasts for this year and next, mainly due to rising energy prices, while expecting consumer price growth to slow only to its 2% target by the end of 2025.

“We have had inflation above target for two consecutive years and are expected to remain above target for the next two years, so we need to see inflation fall back to target in a timely manner,” said one participant at this week’s meeting.

However, the decision to raise borrowing costs for the tenth time in a row has reignited anger in Italy, where Prime Minister Giorgia Meloni’s government has repeatedly protested against the ECB’s strategy to fight inflation.

In a television interview on Thursday evening, Deputy Prime Minister Matteo Salvini slammed the latest move, calling it “an endless mess created by the European Central Bank that does not care about the difficulties of households and businesses, raising the stakes” capital cost”.

“Lagarde lives on Mars… Raising the cost of capital is uneconomic, anti-social and anti-historical,” Salvini said.

Some investors also questioned why the European Central Bank raised interest rates this week because the euro zone’s economic outlook has deteriorated, Germany is on the edge of recession, and euro zone retail sales and industrial production both declined in July.

“Raising interest rates again would be a policy mistake,” said Martin Wahlberg, senior economist at Generali Investors Europe. He said the European Central Bank’s cut of euro zone economic growth forecasts by 0.7% this year and 1% next year still looked “overly optimistic” and expected officials to be “caught off guard” by a further economic slowdown later this year.

Ann-Katrin Petersen, senior investment strategist at BlackRock Investment Institute, said that after the European Central Bank’s “dovish rate hike”, the focus “now starts from how high policy rates can go.” “How long will interest rates stay high?”

Peterson said that the European Central Bank’s unprecedented 4.5 percentage point interest rate hike since last year, coupled with China’s economic weakness and European manufacturers’ destocking, “makes it possible for an economic recession to occur in the next few quarters.” However, she added that this was unlikely to lead to a rate cut “before 2024”.

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