ECB to raise interest rates for a seventh time in inflation fight By Reuters

Written by Balaz Corani and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank will raise interest rates for the seventh consecutive meeting on Thursday as it continues its long struggle against stubborn inflation, with the size of the move still open to debate.

The central bank of the 20-country euro zone has already raised interest rates by a record 350 basis points since July, hoping to stem runaway price growth. But returning inflation to its 2% target remains elusive, leaving policymakers with no choice but to tighten policy again this month and beyond.

A 25bp move, a slowdown after three consecutive 50bp hikes, seems the more likely outcome, although a larger increase is still possible in what is almost certainly not the end of the historic tightening cycle.

The clincher could be a compromise between policymakers on what signals to send about future increases.

Conservative “hawks”, who enjoy a comfortable majority in the Governing Council, are leaning towards a larger increase.

But they signaled they could concede to a smaller move as long as the ECB signals May is not the end of their hikes, even if some of their peers – notably the US Federal Reserve – peaked their interest rates.

ECB tightens moderation https://www.reuters.com/graphics/GLOBAL-MARKET/THEMES/lgvdkazlxpo/chart.png

Another issue is how much willing majority ECB President Christine Lagarde will support the decision.

Many hawks could live with a smaller step given the right guidance, but fellow doves are likely to voice their opposition vocally if the increase were larger, leaving the ECB speaking again with many voices seen as a weakness. for years.

Part of the compromise could be a deal to end reinvestments from July of maturing debt bought under the ECB’s €3.2tn asset purchase program — a modest move that would further shrink the bank’s bloated balance sheet, even if the impact Inflation is minimal.

Markets see an 80% chance of a 25 basis point move while the vast majority of economists polled by Reuters were also betting on the smaller increase.

Backing a possible bearish turn for the European Central Bank, the Federal Reserve raised interest rates by 25 basis points on Wednesday and signaled it may pause further hikes.

Core inflation in the euro area remains flat https://www.reuters.com/graphics/GLOBAL-MARKETS/znpnbngmkpl/chart.png

It’s all about puffing

Economic fundamentals provide plenty of fodder for both sides of the argument.

Supporting the case for a smaller move, the eurozone economy barely grew in the last quarter and lending figures showed the sharpest drop in credit demand in more than a decade, suggesting that previous interest rate hikes are starting to work their way through the economy.

If pushed hard, this credit downturn could turn into a full-blown credit crunch, affecting growth that’s barely in positive territory to begin with.

At 3%, the European Central Bank’s deposit rate is already constraining economic activity, and core inflation has stopped rising – at least for the time being.

Eurozone banks tighten credit https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/znvnbnaqwvl/chart.png

BNP Paribas (OTC:) said in a note: “Inflation figures and the results of the latest bank lending survey conducted by the European Central Bank confirm the case for a shift to 25 basis points.” “At the same time, today’s data also confirms that rates should rise further – we confirm our 3.75% final rate forecast.”

Hooks argues that underlying price growth remains very high and suggests that inflation may stabilize above the ECB’s target unless the bank acts more aggressively.

They say these risks are exacerbated by a tight labor market, especially as wage growth has been faster than expected and the unemployment rate has fallen to an all-time low despite a near-recessionary environment.

“Business surveys are showing a pickup in growth, which could exacerbate labor market tightness, while the policy rate level is only 1% higher than our neutral estimate,” said JP Morgan (NYSE: NYSE) economist Greg Vouzisi. moves.

The ECB will announce its policy decision at 1215 GMT and Lagarde will hold a press conference at 1245 GMT.