In recent years, the outcome of a European Central Bank (ECB) interest rate meeting has not been this uncertain just before the gathering. Whether the ECB will once again raise its key interest rates by 25 basis points next Thursday or take a pause after nine consecutive rate hikes, possibly signaling the end of the rate hike cycle, remains completely unclear even a week before the meeting. ECB Governing Council member Klaas Knot referred to it as a "close decision" on Wednesday.

The unusual uncertainty stems from the dilemma facing the ECB: On the one hand, inflation has halved since its record high of 10.6%, now standing at 5.3%. However, this is still well above the ECB's medium-term target of 2.0%, and core inflation, excluding energy and food, is at 5.3%, close to its springtime peak. On the other hand, the Eurozone economy is struggling, and warnings of a recession are growing.

The hardliners within the ECB Governing Council, known as the "hawks," emphasize the persistently high inflation and the risks it poses. They lean towards further rate hikes, aiming to keep inflation expectations in check. The "doves," on the other hand, highlight economic weakness and advocate caution, especially considering the time lag in the effectiveness of monetary policy, with the full impact of previous rate hikes having yet to materialize. In recent days, market bets have increasingly favored the ECB taking a rate pause on September 14th. At times, the probability of a rate hike was estimated at only around 25%. This shift was driven by statements from the "doves" and weaker economic data, but the key factor was the August inflation data released last Friday. While overall inflation unexpectedly remained at 5.3% instead of decreasing further, core inflation dropped again from 5.5% to 5.3%, which is currently a better gauge of underlying price pressures and is also the focus at the ECB.

On Wednesday, just before the start of the quiet period, the "hawks" emphasized the possibility of another rate hike next week – and with that also sending a warning to the markets. Slovak Central Bank Governor Peter Kazimir stated that the ECB must raise interest rates once more, and the next week would be a better option for that. Dutch Central Bank Governor Klaas Knot suggested that financial markets might be underestimating the probability of a rate hike. Prior to this, Austrian National Bank Governor Robert Holzmann had favored another rate increase.

Next Thursday, the new projections from ECB economists for growth and inflation, particularly the inflation forecast for 2025, will play a crucial role. In June, they had predicted a return to 2% by the end of 2025. The new projection could now be the deciding factor.