LONDON- Calls for an unprecedented jumbo 75 basis point lift to interest rates from the European Central Bank next week are on a knife’s edge as inflation soars although a very slim majority of economists said it would be tamer, a Reuters poll found.
Late to the rate-setting cycle compared to its peers despite rocketing inflation the ECB didn’t start raising borrowing costs until July when it made its first increase in over a decade. Falling behind has put increasing pressure on the euro, now trading below parity to the US dollar.
The ECB surprised many in July with a larger than expected 50 basis point lift, the biggest move in over two decades, taking the refinancing rate to 0.50 percent.
But that clearly was just the beginning, with inflation in the euro zone running at more than four times the Bank’s 2 percent target, reaching a record 9.1 percent last month.
Yet now the ECB faces the prospect of raising rates aggressively just as the economy is almost certainly entering recession, with the probability of one within a year a median 60 percent compared with 45 percent in a July poll.
Just under half, 30 of 61 economists in the Aug. 29-Sept. 2 poll, were expecting a 75 basis point increase on Thursday while 27 said the Bank would deliver 50 basis points. Only four expected a modest quarter-point hike.
Among euro zone market makers, there was a majority for a 75 basis point move, 18 of 26. Indeed, financial markets are now pricing in the jumbo move and over the last few days a slew of economists have changed their view to 75.
The United States Federal Reserve has already made a 75 basis point lift and the Bank of Canada jacked up its key rate by 100 basis points in July and will likely add another 75 next week.
At the central bank conference in Jackson Hole, Wyoming, and subsequently, ECB policymakers have called for decisive and swift action to combat inflation, making clear the choice at next week’s policy meeting would be between 50 and 75 basis points.
