by Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – The European Central Bank (ECB) must decide on Thursday whether to raise interest rates to a record low to combat inflation, or whether to pause as the economy deteriorates.
The central bank faces a dilemma, as inflation in the euro zone remains well above its 2% target and is unlikely to fall below this level in the next two years.
Rising borrowing costs in most countries around the world and the difficulties facing the Chinese economy are weighing on economic growth, and a recession in the euro zone is now a possibility.
Until now, market expectations were divided between a pause or a further increase of 25 basis points after the governors’ meeting on Thursday.
The information revealed by Reuters according to which the ECB forecasts that inflation in the euro zone will remain above 3% next year, however, reinforces the scenario of a further increase in interest rates.
“The inflation dynamics are simply too strong for the ECB to take a break,” said Piet Haines Christiansen, an economist at Danske Bank.
The probability that the ECB will raise rates by 25 basis points on Thursday is currently 65%, according to traders.
An increase of 25 basis points would bring the rate paid by the ECB on bank deposits to 4.0%, the highest level since the launch of the euro in 1999.
( Camille Raynaud)
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