FRANKFURT – The European Central Bank will raise interest rates for the first time in 11 years with a bigger-than-flagged move seen as increasingly likely as policymakers fear losing control of runaway consumer price growth.
With inflation already approaching double digit territory, it is now at risk of getting entrenched above the ECB’s 2 percent target, requiring rate hikes even if that slows – or crashes – an economy already suffering from the impact of Russia’s war in Ukraine.
But policymakers appear far from united on just how fast the ECB should move with some arguing that it is already a long way behind the curve, especially compared to global peers like the U.S. Federal Reserve, while others point to a looming recession the ECB risks exacerbating.
The bank until recently was signalling just a 25 basis point increase to be followed by a bigger move in September but sources close to the discussion said a 50 basis point increase would also be on the table on Thursday as the inflation outlook is deteriorating quickly. (Full Story)
Economists polled by Reuters predicted only a 25 basis point increase but most said the bank should actually hike by 50 basis points, lifting its record low minus 0.5 percent deposit rate to zero.
Complicating the decision, the euro’s recent drop to a two decade low against the dollar also boosts inflation pressures, adding to the case for a bigger rate hike even if that ultimately hurts growth.
A larger increase would, however, require the ECB to shield more indebted nations like Italy or Spain from soaring borrowing costs, so a deal on a new bond purchase scheme, already close to being reached according to sources, would also be needed. – Reuters
