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One (likely) last step

For weeks, financial markets, analysts, and everyone who follows central banks have been looking to answer the question, “Will the European Central Bank continue to raise key interest rates next Thursday, or not?”

There is no clear answer. Nobody has it today.

What we do know is new data on inflation and the labour market situation. The development of inflation in the eurozone in August confirmed that it is clearly too early to declare victory. Inflation remains stubbornly high and inflation expectations remain too far above our two percent target.

Forecasts for inflation and economic growth are yet to be updated. They remain, however, highly uncertain, given in particular the unclear outlook for wage developments.

It is, therefore, necessary to take one more step. As they say, better to be safe than sorry.

One option is to take a break in September and, if necessary, deliver another (hopefully final) increase by 25 basis points in October or December.

The second option seems preferable, reasonable, to me. It is to deliver another 25 basis points next week and take a breather thereafter.

It is a more straightforward and efficient solution. Markets receive a clearer indication about the likely terminal rate, and we have more time to evaluate whether inflation is on a sustainable downward path towards our target.

We’ll see what next week brings, but if it brings an increase in rates, I certainly won’t object.