by Balazs Koranyi and Francesco Canepa
FRANKFURT, Sept 8 (Reuters) – The European Central Bank (ECB) will raise interest rates again on Thursday to fight runaway inflation, with the only question mark over the scale of the hike – at least substantial, and possibly historical.
Fearing that inflation is becoming ever more entrenched, central bank officials are scrambling to find ways to stem the continent’s unprecedented price rise for nearly half a century, with a heavy impact on household savings and business production.
Two options are being considered: an increase of 50 basis points or 75 basis points in the deposit rate, bringing it down to zero this summer. An increase of 75 basis points would be unheard of.
Whatever the ECB’s decision, its policy direction is clear. Additional rate hikes are expected over the next few months, while the pressure on prices should not ease, on the contrary, with the winter.
The markets expect with near certainty a rate hike of 75 basis points. Analysts polled by Reuters are also a small majority anticipating this scenario.
“We think it’s a hair’s breadth, with good arguments on both sides, but at the end of the day we think those in favor of a bigger hike will win out, as September presents the best opportunity to send a signal flash of determination,” commented Jens Eisenschmidt, an economist at Morgan Stanley.
“Whether it’s 50 or 75 basis points (…), we see the cycle of ECB hikes ending 2% in March,” he added.
The ECB’s decision comes with a political dilemma. The central bank’s new forecasts should point to a jump in inflation and markedly slowing economic growth.
With soaring energy prices, purchasing power is at half mast and the European Union is likely to find itself in recession, which could be amplified by aggressive measures from the ECB – in particular with rising energy costs. borrowing for governments as they attempt to provide aid to those most affected by the crisis.
A significant rise in interest rates, after a decade of ultra-low rates, goes against the principles of the central bank, several members of which are in favor of a less marked increase.
However, if taken timidly, expectations of long-term inflation could be bolstered, and the credibility of the ECB in its anti-inflation role eroded. In this case, the euro should also find itself weakened against the dollar, while the US Federal Reserve (Fed) acts more aggressively.
During its meeting, the ECB could also discuss the possibility of starting to reduce its balance sheet, as part of the process of normalizing its monetary policy. However, no decision is expected at this time. (Report Balazs Koranyi; French version Jean Terzian)