Has the ECB reached the end of its tightening cycle: QNB

The European Central Bank (ECB) appears to be nearing the end of its tightening cycle, according to Qatar National Bank (QNB). In its weekly commentary, QNB explained that the ECB's need for further monetary policy tightening may diminish due to several factors.

Firstly, the risks of energy price shocks spilling over into inflation have eased. Despite the ongoing US-Iran conflict, recent inflation data indicate that higher energy costs are not significantly impacting the economy. Both headline and core inflation surprised to the downside in June, while wage growth is moderating, limiting the risk of second-round effects.

Secondly, the Euro Area's growth outlook has weakened. Business activity has been subdued, with the composite Purchasing Managers' Index (PMI) staying below the 50-point threshold for three consecutive months. This weakness has led analysts to revise down their growth forecasts, with consensus predictions now predicting 0.6% real GDP growth this year, down from 1.2% before the US-Iran conflict.

Thirdly, the ECB's policymakers are adopting a more cautious approach. Recent communications indicate a preference for keeping policy rates unchanged, rather than committing to a specific path. At the June meeting, the Governing Council emphasized a data-dependent, meeting-by-meeting approach. This cautious stance was reinforced at the ECB's annual Forum on Central Banking in Sintra, Portugal, where central bankers and other participants discussed the global economic outlook and monetary policy challenges.

In light of these developments, QNB believes further monetary tightening is unlikely, and policy rates may remain unchanged over the remainder of the year.