BY CAROLINE AMOSUN
In an ongoing effort to combat inflation amidst a looming recession, the European Central Bank is poised to implement another interest rate hike on Thursday.
This move follows a series of consecutive rate increases, with analysts predicting a 25 basis points raise, bringing the deposit rate to 3.50 percent.
If implemented, this would mark the eighth consecutive interest rate hike by the Frankfurt institution since July of the previous year.
The decision to tighten monetary policy came after Russia’s war in Ukraine led to a surge in food and energy prices.
The ECB’s efforts have shown some impacts, as eurozone inflation has decreased from a peak of 10.6 percent in October to 6.1 percent year-on-year in May.
However, with the bank’s inflation target of two percent still out of reach, policymakers have emphasized the need to maintain the momentum and hinted at the possibility of further rate hikes beyond June.
ECB President, Christine Lagarde suggested that while rates were approaching the desired level, efforts to combat inflation must continue.
In contrast, the United States Federal Reserve is expected to pause its cycle of interest rate hikes on Wednesday, as it assesses the effects of its tightening measures on the real economy.
The divergence in monetary policy between the two regions reflects the delicate balance central banks must strike between curbing inflation and avoiding a severe economic downturn.
Recent revised data revealed an unexpected contraction of 0.1 percent in the eurozone for two consecutive quarters at the end of 2022 and the beginning of 2023, meeting the technical definition of a recession.
While this recession is relatively mild, it raises concerns about the region’s ability to withstand the aftermath of Russia’s war, casting doubt on more optimistic predictions for 2023.
ING bank economist, Carsten Brzeski noted that the eurozone’s economy has proven to be less resilient than previously anticipated.
However, he believes that despite the disappointing data, the ECB will remain focused on its goal of reducing inflation.
Capital Economics economist, Jack Allen-Reynolds expects the ECB to provide indications of a further 25 basis-point increase in July and stress that interest rates will remain high for an extended period.
The ECB’s decision will be influenced by its latest economic forecasts, which will be unveiled during the upcoming meeting.
These projections are unlikely to deviate significantly from the previous ones, which predicted inflation would return to target levels of 2.1 percent by 2025.
While falling energy prices and improvements in supply chain bottlenecks have contributed to easing inflation in recent months, the prices of services remain high due to robust demand in the tourism sector. ECB officials have also expressed concerns about wage-driven inflation, as workers leverage the historically low unemployment rate in the eurozone to demand higher salaries to compensate for rising living costs.
As policymakers deliberate on when to change course, they closely monitor core inflation, which excludes volatile food and alcohol prices.
Core inflation in the eurozone has remained persistently high, marginally easing to 5.3 percent in May from 5.6 percent in April.
The ECB’s most recent forecasts indicate a core inflation rate of 2.2 percent by 2025.
