FRANKFURT (AFP) – The European Central Bank (ECB) is expected to set aside recession worries and deliver another jumbo interest rate hike this week to cool inflation, as the war on Ukraine sends energy prices soaring.
Inflation in the 19-nation eurozone climbed to an all-time high of nearly 10 per cent in September, five times the ECB’s target of two per cent.
The ECB’s governing council last month raised its key interest rates by an unprecedented 75 basis points, and many observers expect it to repeat the move at Thursday’s meeting.
Households and businesses are bracing for a grim winter as Russia continues to squeeze gas supplies to Europe, raising fears of energy shortages and eye-wateringly high electricity and heating bills.
The war has also pushed up food costs, while pandemic-era supply chain snarls combined with higher manufacturing costs have added to price pressures on a range of goods.
“Those who thought inflation was dead now know better,” said Head of Germany’s Bundesbank central bank Joachim Nagel. “Now the beast has woken up from its slumber… it’s up to monetary policymakers to tame it again,” he recently told students at Harvard University.
Like other central banks, the ECB is using a series of rate hikes to bring inflation under control – at the risk of slowing economic activity to such an extent that it triggers a downturn.
“The 75 basis point rate hike looks like a done deal,” said ING economist Carsten Brzeski.
“The ECB has turned a blind eye on recession risks,” he added.
Analysts from Capital Economics said they saw the ECB going even bigger, predicting a 100 basis-point jump followed by smaller hikes over the coming months.
In the United States (US), where inflation is running at a 40-year high, the Federal Reserve (Fed) recently said there was no “painless” way to combat runaway prices.
A slowdown of economic growth and the US job market will be “required” to bring down inflation, said the Fed, which has hiked rates faster and more aggressively than the ECB.
ECB President Christine Lagarde has warned that the euro area was also facing “a significant slowdown”. If Russia completely cuts off gas flows to Europe, the eurozone economy could shrink by nearly one per cent in 2023, ECB Vice-President Luis de Guindos added.
The German economy, whose energy-hungry industries relied heavily on Russian gas before the war, is now forecast to shrink by 0.4 per cent in 2023.
Chancellor Olaf Scholz has unveiled a EUR200-billion (USD197 billion) energy fund to help citizens cope with price shocks, irking European neighbours who can’t afford the same fiscal largesse.
With other eurozone countries such as France and Spain also rolling out support measures, the ECB has warned governments not to fall into the trap of spending so much that they
boost inflation.
Germany’s Finance Minister Christian Lindner agreed, saying last week that fiscal policy “must not counter the measures of central banks” by strengthening demand.
