by Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank (ECB) forecasts that inflation in the euro zone will remain above 3% next year, supporting the scenario of a further rise in interest rates on Thursday, according to a source close to the discussions of the heads of the institution.
The central bank began a two-day meeting on Wednesday that is expected to decide on interest rates amid persistent inflation and growing recession fears.
Until now, market expectations were divided between a pause or a further increase of 25 basis points after the governors’ meeting on Thursday. But the ECB’s inflation forecast leans in favor of a further increase in the cost of credit.
Money markets show that 70% of investors now expect a rate hike on Thursday, compared to only 40% on Tuesday.
The ECB’s quarterly forecasts, which are due to be presented to the governing council on Wednesday, show inflation above 3% in 2024, the source said.
In its latest forecasts published in June, the central bank expected inflation of 3% next year.
An ECB spokesperson declined to comment.
The updated inflation projection for 2024 is well above the central bank’s 2% target and higher than the 2.7% forecast by a Reuters survey of economists.
The source told Reuters the decision on rates had not been finalized and formal proposals for the meeting had yet to be presented.
The ECB raised its deposit rate from -0.5% to 3.75% over the past 14 months, the fastest rate of monetary tightening in its history, in order to curb high inflation.
According to the source, the ECB will lower its economic growth forecasts for 2023 and 2024, in line with market expectations.
Economists polled by Reuters expect euro zone gross domestic product (GDP) growth of 0.6% this year and 0.9% in 2024.
(Written by Balazs Koranyi; Blandine Hénault for the French version)
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