FRANKFURT (Reuters) – The European Central Bank is set to decide on Thursday whether to raise its key interest rate to a record peak in what should be its final step in the fight against inflation or take a break as the economy deteriorates. .
The central banks of the 20 countries that use the euro face a dilemma. Even after nine consecutive interest rate increases, rates are rising at more than double their 2% target, and are not expected to slow to that level for another two years.
But high borrowing costs in most parts of the world and the economic distress experienced by China are negatively affecting economic growth, as a recession in the euro zone has now become a clear possibility.
Analysts and investors were leaning toward halting interest rate hikes by the European Central Bank until Reuters reported on Tuesday that the central bank was set to raise its inflation forecast for next year to more than 3%, strengthening the case for a rate hike.
Policymakers saw the 2024 forecast as crucial to determining whether inflation, currently still above 5%, is back on target or risks remaining at a higher level for too long.
“The inflation momentum is too strong for the ECB to pause,” said Piet Heinz Christiansen, economist at Danske Bank.
In a poll conducted by Reuters from September 5 to 7, the majority of economists expected that the European Central Bank would keep interest rates steady this week, but with the change in mood, financial markets now expect a 63% chance of raising interest rates, and it is expected to be the last in the cycle. That started. In July 2022.0 #ECBWATCH.
In contrast, markets have priced interest rates completely unchanged at next week’s meeting of the US Federal Reserve, which began raising interest rates earlier and moved to a higher level than the European Central Bank.
A 25 basis point increase on Thursday would raise the interest rate the European Central Bank pays on bank deposits to 4.0%, the highest level since the launch of the euro in 1999.
Just 14 months ago, this rate was sitting at a record low of negative 0.5%, meaning banks had to pay to keep their money safely at the central bank.
UniCredit Bank analysts said Thursday was a crucial now-or-never moment for another rise in borrowing costs.
“If the ECB does not raise interest rates, it will appear hawkish and will try to convince financial markets of the possibility of raising interest rates at one of its subsequent meetings,” they said in a note.
“We doubt that this will be possible and expect that today’s decision to hold interest rates will mark the end of the tightening cycle.”
New expectations
Supporters of raising interest rates this week are likely to argue that it is necessary because inflation, including core measures that exclude volatile components, remains too high, with the recent rise in energy prices threatening a new acceleration.
But the active tightening cycle – twice as severe as would normally be expected in the European Central Bank’s stress tests of the banking sector – has already left its mark on the eurozone economy.
With the manufacturing sector, which typically needs more capital to operate, suffering as a result of rising borrowing costs, lending to businesses and households has fallen to the ground.
Services are now also starting to struggle after a short boom in tourism following the pandemic.
Germany, the largest economy in the euro zone, is bearing the brunt of the industrial recession and is headed toward recession, according to many forecasts.
The European Central Bank on Thursday is also expected to cut its growth forecasts for this year and next, prompting some economists to say it should stop raising interest rates this month.
“While core inflation is only showing tentative signs of easing, the growth outlook is quickly darkening, suggesting less need for tightening,” said Dirk Schumacher, economist at Natixis.
Once the interest rate hikes end, the ECB will likely begin a discussion about getting rid of more of the cash it has pumped into the banking system through various stimulus plans over the past decade, although a decision on the matter is not expected this week. .
The European Central Bank will announce its interest rate decision at 1215 GMT. European Central Bank President Christine Lagarde will hold a press conference at 1245 GMT.
Edited by Catherine Evans
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