European Central Bank set to hike rates for first time in 11 years

The ECB announced that it would raise rates in July and September to counter record inflation.

Daniel Roland | AFP | Getty Images

FRANKFURT, Germany — The Governing Council of the European Central Bank is expected to have deep and candid conversations on Thursday about the scale of its first rate hike in 11 years as the cost of living remains stubbornly high in the region.

The euro hit a near two-week high and euro zone government bond yields jumped on Tuesday morning after Reuters reported, citing a source, that the ECB will assess whether to go higher 50 basis points instead of 25 basis points. already in pencil.

“It is possible that the ECB wants the option of a 50 basis point hike due to something it has seen in the unpublished data on inflation expectations,” said Mark Wall and his team. from Deutsche Bank Research in a recent note.

“It is also possible that the option of a 50 basis point hike will help negotiate the details of a powerful anti-fragmentation tool,” he added, mentioning the new stimulus package to be launched. on Thursday and which would target soaring debt yields in peripheral countries. like Italy.

The details of this new anti-fragmentation tool will be closely watched and will come at a critical time as Italy faces another serious political crisis.

“While ECB President Lagarde is expected to underline the temporary nature of the instrument, due to the exceptional circumstances in which the Eurozone finds itself, she will also underline the ECB’s determination to guarantee the integrity of the monetary union, thus trying to evoke a ‘whatever spirit’, said Dirk Schumacher of Natixis in a research note.

“The fine line President Lagarde will have to walk here – also in light of the political situation in Italy – increases the risk of ‘misunderstanding’ and erratic market movements,” Schumacher added.

The new tool and a significant rate hike would come as the ECB deals with its core mandate: price stability. Eurozone inflation in June was 8.6%, down 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 may be slowly improving.

“The prices of intermediate goods (excluding energy) did not rise as strongly as before. Here, the year-on-year comparison fell for the second month in a row, partly due to the somewhat lower metal prices,” Commerzbank analysts noted. when looking at recent data.

“As intermediate goods are ahead of consumer goods prices in this cycle, this raises hopes that the latter will also peak in the coming months.”

The economic outlook is very uncertain at this stage amid growing risk of gas disruption over the coming weeks. Europe is bracing for a prolonged shutdown of Russian gas supplies as maintenance continues on the Nord Stream 1 gas pipeline which carries gas to Germany via the Baltic Sea.

Some fear that the suspension of deliveries could be extended beyond the 10-day deadline, derailing the region’s winter supply preparations.

“Importantly, the ECB may need to continue to tighten policy, even in a mild recession, if accelerating wages and continued high energy prices lead to rising inflation expectations,” Anatoly Annenkov said in a research note.

“We believe that raising the policy rate at least to the lower end of the range of natural rate estimates (1-2%) therefore makes sense in order to be in a better position next year to face the inflation outlook. “, he added.

—CNBC’s Sam Meredith and Elliot Smith contributed to this article.

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