ECB set to hike again but analysts divided on how much

The European Central Bank is expected to deliver another interest rate increase on Thursday, but analysts are divided on how big the hike will be against a backdrop of stubborn inflation and market turmoil.

There is little doubt the central bank will hike borrowing costs for the seventh consecutive time as consumer price increases are still way above its two-percent target.

The Frankfurt-based institution has already lifted rates 3.5 percentage points since July last year to tame energy and food costs that surged after Russia invaded Ukraine.

But there is debate about whether the ECB will opt for a 50-basis point hike -- as it did at its previous three meetings -- or downshift to 25 basis points.

Currently many analysts are betting on a quarter point hike, due to slowing inflation as well as a stable outlook in the 20-nation currency club.

Data last week showed the eurozone economy expanding 0.1 per cent in the first quarter.

While modest, EU officials said the figure indicated “resilience” against the challenging backdrop of the energy crisis.

However, several data releases due on Tuesday -- including a first estimate of eurozone inflation for April -- may change calculations.

“Both a 25-basis point and a 50-basis point rate hike seem to be on the table,” said ING economist Carsten Brzeski, adding there was a growing debate between “hawks” and “doves” about the impacts of tightening.

But he added that given the divide within the ECB, a quarter point increase would be a “typical European compromise”.

Still, if eurozone inflation comes in higher than expected, the “hawks” may yet win the argument for a larger hike.

But easing inflation in Germany for April may be the harbinger for lower consumer prices too elsewhere in the eurozone. On Friday, the IMF’s European department director Alfred Kammer urged European central banks to push on with tightening and “kill the beast” of inflation.

In March, consumer prices in the eurozone rose by 6.9 per cent on an annual basis -- the lowest rate in a year, and much below the peak of 10.6 per cent in October.

But ECB officials are concerned that core inflation, excluding volatile energy and food costs, is stubbornly high.

The bank’s three main rates currently sit in range between 3.00 and 3.75 per cent, the highest levels since October 2008.

A day ahead of the ECB’s announcement, the US Federal Reserve is set to unveil its latest rate decision, with traders expecting another quarter point hike.

Ahead of their last meeting in March, European policymakers faced calls to abandon a previously announced rate hike due to turmoil on markets.

The collapse of three regional US lenders and the enforced takeover of Credit Suisse by rival UBS triggered the upheaval, and sparked fears of a broader financial crisis.

But the ECB stuck to its planned 50 basis point increase, while insisting eurozone banks were stable and well-capitalised.

Still, the turbulence may have prompted some ECB policymakers to reflect on the cost of its unprecedented monetary tightening campaign.

Speaking last month, bank president Christine Lagarde said the tensions could have added “downside risks” in the eurozone.

Among Tuesday’s data releases is an ECB lending survey, which may hold clues as to whether the turmoil has discouraged banks from giving out loans.

But the market turbulence has now largely eased and, in recent public statements, ECB officials have pledged to pursue their tightening campaign.

Current data are “indicating that we should raise rates again”, chief economist Philip Lane said in an interview published last week.

“This is still not the right time to stop.”

The ECB may also say more on Thursday about its efforts to wind down its huge balance sheet, swollen by years of anti-crisis measures.

Separately on Saturday, Ireland called on the European Central Bank to temper interest rate rises ahead of a decision next week, citing their “real-life” impact on ordinary people.

The ECB has raised rates by 3.5 percentage points since July in an unprecedented campaign of monetary tightening to rein in inflation.

Irish Finance Minister Michael McGrath urged the ECB “to take account of the real-life impact on people of the decisions that are made.”