FRANKFURT (Reuters) – The US Federal Reserve may give clearer hints on when it will hike the cost of borrowing in the United States in the coming week, as struggling Europe braces for a tight vote in Scotland on whether to leave the United Kingdom.
As the US economy picks up pace, its central bank is inching closer to raising interest rates, a move that will send ripples across the globe. In the euro zone, however, the European Central Bank is moving in the opposite direction in a desperate bid to rekindle growth and inflation.
The United States is shaking off the hangover from a financial crisis that hammered Europe and even knocked mighty China off its stride.
But the US rebound, thanks in large part to cheap Fed money, now means Federal Reserve Chair Janet Yellen will have to decide when to pare back this support.
Further hints as to when the first US rate hike in more than eight years will happen could come on Wednesday in a statement after the bank’s governors meet.
“It does seem like a done deal that it is going to increase interest rates,” said Paul Dales of economics consultancy Capital Economics.
“We are going into a new phase where the Fed is trying to bring things back to normal. It can send reverberations around the world economy.”
Choosing when to increase the cost of borrowing in the world’s biggest economy – a move expected next year – is a delicate balancing act.
Yellen and others will be trying to work out how to keep the economic recovery on a steady keel without stopping it before the effects of the upswing lead to higher wages.
By contrast, the European Central Bank recently cut the cost of borrowing to near zero and pledged to buy repackaged debt in a bid to kick-start lending to small companies.
For some, the eventual move in Washington will be good news for Europe.
“This will help to weaken the euro and a weaker euro will help countries like Ireland, Portugal and Spain to sell more to the rest of the world,” said Philip Lane, an economist at Trinity College Dublin.
But for others, the contrast underscores Europe’s weakness.
“America is so much further than Europe,” said Joerg Kraemer, chief economist of Commerzbank. “Any hope of economic improvement here has disappeared over the Summer.”
On the same day as central bankers gather in Washington, the euro zone will give further insight into why price inflation, an important yardstick of the recovery, plumbed new lows in August.
On Thursday the ECB will also reveal how much of its first offer of four-year loans banks have taken up on condition that they lend on to businesses, as part of the central bank’s efforts to bolster the flagging economy in the 18-country bloc.
ECB President Mario Draghi says the aim is to get the ECB’s balance sheet back near its 2012 peak via new measures, meaning it is aiming to inject the thick end of 1 trillion euros into the euro zone economy.
Reuters polling shows that economists expect banks to take up 275 billion euros of the 400 billion the ECB will offer over time and that they will buy around 400 billion euros of asset-backed securities and covered bonds over the next two years under a separate scheme.
Adding to Europe’s woes, the conflict in Ukraine is making investors and companies nervous.
Despite a fragile ceasefire between Ukrainian government forces and Russian-backed rebels, the EU has introduced further sanctions against Moscow. Sanctions are hurting Russia and further signs of that will be seen next week in data such as measures of fresh capital investment – once a major driver of its economy.