FRANKFURT, Sept 8 (Reuters) – The European Central Bank will raise interest rates again on Thursday to fight runaway inflation and, with a big move and a record one under consideration, the only question is by how much. Concerned that sky-high inflation is getting increasingly entrenched, policymakers are scrambling to keep a lid on the bloc’s most damaging bout of price growth in nearly half a century as it eats up household savings and weighs on business output. Ultimately, the choice will be between a 50 and a 75 basis point increase in the zero percent deposit rate, with expectations now leaning towards a bigger increase but not with full conviction. The larger move would be the biggest ever increase of the ECB’s benchmark rate, but regardless of the outcome the bank’s direction of travel will be clear. More hikes are factored in for coming months as price pressures are consistently exceeding even the most pessimistic forecasts.
Buoyed by hawkish comments from conservative policymakers, markets now see a more than 80% chance of a 75 basis point hike. A slim majority of economists polled by Reuters are also predicting the larger increase. “With the hawks continuing to hold the upper hand, we think the ECB will deliver a 75 basis point increase,” BNP Paribas economist Paul Hollingsworth said. “We now expect a more front-loaded tightening cycle that takes the deposit rate up to a terminal rate of 2% by the end of the first quarter.” The decision also encapsulates a policy dilemma. Updates to ECB forecasts are certain to show sharply higher inflation but significantly weaker economic growth. Sky-high energy prices will sap purchasing power and almost certainly plunge the bloc into a recession that could be exacerbated by an aggressive ECB, especially with borrowing costs rising for governments as they try to help those most affected. A big hike after a decade of ultra-low rates also goes against the ECB’s guidance for gradualism and several policymakers, including board member Fabio Panetta and Greek central bank chief Yannis Stournaras, have made the case for a smaller move. Headline euro zone inflation is over 9% while its underlying rate is 4.3%, more than twice the ECB’s target, indicating that more and more of the energy-driven price pressures are seeping into the broader economy. The coming recession also makes the case for front-loading rate hikes as moving aggressively once the downturn takes hold will be difficult to communicate. NN: The ECB raised rates by a whopping 75 bases points today… Its biggest rate increase ever. I believe this could signal the start of a turn around in the Euro. The US Fed Reserve went first raising rates. And that forced capital into dollar assets. Now the the EU is catching up. i believe in time the Euro will return to previous levels against the dollar