The European Central Bank will address rising interest rates by half a percentage point this week, surpassing its own orientation as it seeks to cope with record inflation and large increases in lending costs across much of the world.
The euro recovered from a 20-year low against the dollar, during which it fell briefly below the value of the dollar, according to reports that the ECB is considering raising its deposit rate by less than 0.5%. to zero at their Thursday meeting.
Such a move would exceed the expectations of most economists, as the central bank said after its latest decision in early June that it intended to raise rates by 25 basis points.
Eurozone government bond prices fell ahead of expectations of a larger-than-expected jump in public sector borrowing costs in the region.
The ECB also faces fears of an economic recession and political instability in Italy, one of the most indebted countries in the region, where Prime Minister Mario Draghi has lost the support of a key party. talk about early elections.
As the ECB prepares to increase lending costs, banks have already reduced the supply of loans to euro area businesses and households, especially in Italy and France, as a reflection of the reduction in lending. risk appetite and higher financing costs, according to the ECB’s quarterly survey of lenders. .
In a worrying sign for future growth, demand from loan companies to finance the investment fell in the three months to June, “indicating that they may be delaying investment in the current environment of uncertainty,” he said. the ECB, and added that banks expect to cut more lending in the third quarter.
The debate among the 25 members of the central bank’s governing council, which begins on Wednesday, is expected to reflect the growing concern behind the inflation curve, which reached an all-time high for the eurozone. 8.6% in June.
The increase would be the central bank’s first in more than a decade, and a 50 bp increase would end an eight-year experiment with negative rates. The last time the ECB raised rates by 50 bp was in June 2000.
“The case for a 50 basis point rate hike has been there for a long time, and certainly the ECB should have done it a long time ago,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “But it’s not the decision itself that would be an issue, but the timing and the way it’s been communicated.”
The ECB is due to release its latest survey of professional forecasters on Thursday a day after its policy decision, which is likely to show that long-term inflation expectations have risen even further above its 2% target. Ducrozet said that if the ECB’s rate fixers already knew the results, it could persuade some of them to opt for a higher rate hike.
Some members of the ECB’s board, including those in Baltic countries where inflation is close to 20 percent, have broken ranks to publicly call for a 50 bp rate hike on Thursday. However, no decision has been made and the ECB declined to comment on the plan to discuss a larger-than-expected rate hike, first reported by Reuters.
Most central banks around the world have reacted faster than the ECB to continued rising inflation, as energy and food prices have been driven upwards by the aftermath of the invasion. of Ukraine by Russia, and several have raised rates more than expected recently.
The Federal Reserve exceeded its own target last month to raise rates by 75 bp for the first time since 1994, while the Swiss central bank surprised markets with a 50 bp rate hike last month and the Bank of Canada raised rates by 100 bp last week.
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After the ECB board met in Amsterdam last month, its chairman Christine Lagarde said she “intended” to raise interest rates by 25 bp at the July meeting and could raise them by a larger amount at the September meeting if inflation remains high.
When asked at the post-meeting press conference why the ECB seemed to rule out a 50 bp rate hike in July, Lagarde said: “It’s good practice, and in fact most banks do it often. power stations around the world, to start with an incremental increase that is important, not excessive and that indicates a path ”.
But at an ECB conference a few weeks later, he said there were “clearly conditions under which gradualism would not be appropriate” and this would require “withdrawing accommodation more quickly to eliminate the risk of a self-fulfilling spiral”.
These included a “derailment” of inflation expectations and a “more permanent loss of economic potential” caused by a cut in Russian energy supply in Europe.