The ECB has announced that it will hike interest rates in July and September to counter record inflation.
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FRANKFURT, Germany – The Governing Council of the European Central Bank is expected to hold deep and candid talks on Thursday about the magnitude of its first rate hike in 11 years as the cost of living in the region remains stubbornly high.
The euro soared to near a two-week high and euro-zone government bond yields jumped Tuesday morning after R, citing a source, reported the ECB will weigh whether to opt for a 50 hike rather than the 25 basis points are already marked.
“It is possible that the ECB may want the option of a 50 basis point hike due to unreleased data on inflation expectations,” Mark Wall and his team at Deutsche Bank Research said in a recent statement.
“It’s also possible that the option of a 50bp hike will help negotiate the details of a strong anti-fragmentation tool,” he added, mentioning the new stimulus plan, which is set to be launched on Thursday and is on the up would target debt yields in peripheral countries like Italy.
Details of this new anti-fragmentation tool are being closely monitored and come at a critical time as Italy faces another serious political crisis.
“While ECB President Lagarde is likely to emphasize the temporary nature of the instrument, due to the exceptional circumstances the euro area finds itself in, she will also underscore the ECB’s determination to ensure the integrity of the monetary union, thereby attempting to ‘what it takes’ spirit,” says Dirk Schumacher from Natixis in a research note.
“The fine line that President Lagarde has to walk here – also given the political situation in Italy – increases the risk of a ‘misunderstanding’ and unpredictable market movements,” added Schumacher.
The new tool and a sizeable rate hike would both come as the ECB addresses its primary mandate: price stability. Euro-zone inflation data for June came in at 8.6%, up from 8.1% in May, and German producer prices in June were 32.7% higher than a year earlier. However, there are signs that things could be slowly getting better.
“Prices of intermediate goods (excluding energy) have not risen as much as before. Here, the year-on-year comparison fell for the second month in a row, partly due to slightly lower metal prices,” the analysts at Commerzbank stated when looking at the current data.
“As intermediate goods are ahead of consumer goods prices in this cycle, it gives hope that the latter will also peak in the coming months.”
The economic outlook is very uncertain at this point as the risk of a gas disruption increases in the coming weeks. Europe is preparing for a prolonged shutdown of Russian gas supplies as maintenance work continues on the Nord Stream 1 pipeline, which brings gas to Germany via the Baltic Sea.
Some fear the suspension of supplies could be extended beyond the 10-day period, which could derail preparations for the region’s winter supplies.
“Importantly, the ECB may need to tighten monetary policy even during a mild recession, when wage increases and persistently high energy prices lead to rising inflation expectations,” Anatoly Annenkov said in a research note.
“We believe that raising policy rates at least to the lower end of the natural rate estimate range (1-2%) therefore makes sense to be in a better position to address the inflation outlook next year,” he added.
– CNBC’s Sam Meredith and Elliot Smith contributed to this article.