ECB tipped to hike rates again, as Fed hits pause

The European Central Bank is expected to again hike interest rates on Thursday and signal that the fight against inflation is not over yet, analysts said, even as the eurozone falls into recession.

With inflation slowing but still three times above the ECB’s two-per cent target, there is little doubt the Frankfurt institution will raise borrowing costs for an eighth consecutive time.

A 0.25-percentage-point hike “looks like a done deal”, Capital Economics economist Jack Allen-Reynolds said.

More interesting to investors will be any clues from president Christine Lagarde at her afternoon press conference in Frankfurt about how much higher rates will go -- or if a pause might be on the horizon.

The Federal Reserve, which began lifting rates earlier than the ECB, on Wednesday, opted to stand pat after 10 straight increases.

But the US central bank indicated that further rate rises could be needed this year, as inflation was still double the target rate and the jobs market in the world’s top economy remained tight.

China’s central bank meanwhile on Thursday cut a key interest rate and pumped billions into financial markets as more data showed the world’s second-largest economy was flagging.

The reaction to the announcements was mixed on global markets, with European stocks opening lower ahead of the ECB’s rate decision at 1315 GMT.

The ECB embarked on an unprecedented campaign of monetary tightening after Russia’s war in Ukraine sent food and energy prices soaring, raising its interest rates by 3.75 per centage points since last July.

Another quarter-point hike on Thursday would take the closely watched deposit rate to 3.50 per cent.

No evidence yet

Eurozone inflation eased to 6.1 per cent in May year on year, from a peak of 10.6 per cent in October, mainly thanks to rapidly declining energy prices.

But core, or underlying, inflation -- a closely-watched indicator that strips out volatile food and energy prices -- decelerated only slightly to 5.3 per cent, from 5.6 per cent in April.

“There is no clear evidence that underlying inflation has peaked,” Lagarde warned earlier this month, stressing that the ECB still had “ground to cover” on rates.

Like all central banks, the ECB has to walk a fine line in raising interest rates sufficiently to dampen demand and contain inflation, without provoking a sharp economic slowdown in the process.

Higher borrowing costs have already led to a plunge in demand for credit from households and companies, recent data showed, suggesting the ECB’s moves are having an impact.

But the eurozone economy has proved less resilient than initially thought.