FRANKFURT, Germany: The European Central Bank is poised to join the US Federal Reserve on Thursday in a bid to help prevent record inflation, even as it worsens the economic slowdown plaguing Europe.
The meeting of the bank's governing council will not discuss whether to raise rates for the 19 countries that use the euro currency. Rather, analysts say they are debating how much to raise: Between half a percentage point and three-quarters of a point is enough. The bank posted its first hike in 11 years at its last meeting in July, raising rates by half a point when it normally moves only a quarter point.
The ECB, which once predicted no rate increases at all this year, has torn up its road map in the face of record inflation of 9.1% last month, which has been driven by skyrocketing prices for natural gas and lasted much longer than expected. Inflation is far above the bank's goal of 2% considered healthiest for the economy.
The price of natural gas, used to generate electricity, heat homes and run factories, has soared more than tenfold as Russia again halted deliveries as tensions flared over the war in Ukraine. European politicians call it to blackmail over their support for Kyiv.
The resulting inflation makes everything from groceries to utility bills more expensive, creating a cost-of-living crisis that will worsen as many economists predict the eurozone will slide into recession later this year and into 2023.
At her last news conference in July, ECB President Christine Lagarde said that under the bank's baseline economic forecast, “there is no recession, neither this year nor next year. Is the horizon cloudy? Of course, it is.”
Raising interest rates is the typical central bank antidote for higher inflation. Higher rates influence the cost of credit throughout the economy, making it more expensive to borrow, consume and invest, thus dampening the demand for goods. The problem is that inflation is not coming so much from demand, but from the supply side of the economy — oil and natural gas costs — which the ECB can do little about directly.
The ECB has lagged behind other central banks in raising interest rates, and analysts say there are concerns about its credibility as the inflation fighter is at risk, leaving open the possibility of faster-than-expected rate rises in a few weeks.
Its benchmark for lending to banks is 0.5%. The Fed's key benchmark is 2.25% to 2.50% after several big rate hikes, including two to three-quarters of a point. The Bank of England's main benchmark is 1.75%.
Schnabel, a member of the six-member executive board, said at the Federal Reserve Symposium that the crucial decision offers the bank a chance to eliminate excess inflation "even at the risk of lower growth and higher unemployment."
Higher rates could help the fight against inflation by raising the euro's exchange rate against the dollar and other currencies. That's because the euro's recent slide to under $1 — driven by soaring energy costs and dampening economic prospects — makes imported goods, including energy, more expensive.