ECB to raise rates further even as economy stutters
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The European Central Bank is all but certain to raise borrowing costs to their highest level in 22 years on Thursday and leave the door open to more hikes, extending its fight against high inflation even as the euro zone economy flags.
Growth across the 20 countries that share the euro is at best stagnating and inflation has been moderating for months, courtesy of lower energy prices and the steepest increase in interest rates in the ECB’s 25-year history.Furthermore, the U.S. Federal Reserve broke a string of 10 successive rate hikes late on Wednesday, a powerful signal for investors around the world that the current tightening cycle across developed economies is nearing an end, even if more U.S. rate hikes are still likely.But inflation in the euro zone is still unacceptably high for the ECB at 6.1% – more than three times its 2% target – and underlying price growth, which typically excludes food and energy, is only starting to slow.
That is likely to keep the ECB on the tightening path, particularly after it failed to predict the current bout of high inflation and began raising rates later than many global peers last year.
“They simply cannot afford to mess it up once again,” said Carsten Brzeski, the global head of macro at Dutch bank ING.
The ECB is predicted to increase the deposit rate – the interest rate banks pay to park cash securely at the central bank – for the eighth consecutive time, by 25 basis points to 3.5%, its highest level since 2001.
Economists polled by Reuters expect another move of the same magnitude in July before the ECB pauses for the rest of 2023.
ECB President Christine Lagarde is nevertheless expected to keep a further hike in September in play during her press conference on Thursday, and to push back against traders’ bets that the central bank will cut rates next year.
“We expect the ECB to leave the possibility of a terminal rate above 3.75% on the table and to encourage the market to price out some of the 2024 rate cuts,” economists at Deutsche Bank wrote in a note.
