Analysts are likely to copy European Central Bank policymakers to copy May’s decision by raising borrowing costs by 25 basis points, taking the closely watched interest rate to 3.5%.
It will be the eighth consecutive time the Frankfurt-based institution has raised interest rates since last July, when it launched an unprecedented campaign to tighten monetary policies after Russia’s war in Ukraine drove up costs energy and food.
Eurozone inflation slowed to 6.1% year-on-year in May after peaking at 10.6% in October, indicating the impact of efforts by the European Central Bank.
But although the bank’s 2% inflation target is still a long way off, policymakers have stressed that it is too early now to abandon the interest rate hike, indicating that the rate hikes will continue in the coming months.
European Central Bank President Christine Lagarde said earlier this month that interest rates this month were “close to the appropriate level” but that “we need to keep raising them.”
The scene looks different in the United States, where the Federal Reserve is expected to stop raising rates on Wednesday after raising them 10 times in a row, while monitoring the impact of the tightening on the real economy.
sudden recession
Like central banks around the world, the European Central Bank must balance rising borrowing costs to dampen demand, keep inflation under control and avoid triggering a deep economic downturn.
Data revised last week showed that the eurozone economy, which includes 20 countries, shrank 0.1% for two consecutive quarters at the end of 2022 and the beginning of 2023, in line with the technical definition of a recession.
Although still subdued, the sharp winter recession is heightening fears that the region has not coped with the fallout from the Russian war as well as it thought, casting doubt on more optimistic forecasts for the year 2023.
“The eurozone economy has proven less resilient than believed a few weeks ago,” said ING Bank economist Carsten Brzewski.
But he ruled out that the disappointing data would discourage the European Central Bank at a time when it is still very focused on curbing inflation.
Capital Economics economist Jack Allen-Reynolds said he expects the ECB to “hint” on a further 25 basis point hike in July and stresses that rates will stay high “for a long time. “.
Better wages
Much will depend on the latest economic forecasts from the ECB, which will be released on Thursday.
Observers expected negligible changes from previous expectations, which rule out inflation returning to the target rate before 2025, when it should finally register 2.1%.
Although the rapid decline in energy prices and the disappearance of supply chain bottlenecks have helped to dampen inflation in recent months, prices for services remain high, in part due to the strong demand in the tourism sector.
European Central Bank officials have also expressed concern that wages are becoming a major driver of inflation at a time when workers are taking advantage of record unemployment in the euro zone to demand wage increases. to offset the rising cost of living.
Policymakers have stressed that they are watching core or core inflation, which excludes food and alcohol price volatility, when considering the appropriate time to change the current trend.
Core inflation remained high in the euro zone, falling slightly to 5.3% in May from 5.6% in April.
Last week, Lagarde warned that “there is no clear evidence that underlying inflation has peaked.”
Deutsche Bank economists said the ECB would need “strong evidence of a slowdown in underlying inflation” before it “overshoots or halts” its rate hike cycle.
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