The European Central Bank will this week broach raising interest rates by half a percentage point, outstripping its own guidance, as it seeks to contend with record inflation and big increases in borrowing costs across much of the world.
Such a step would exceed most economists’ expectations, since the central bank said after its last decision in early June that it intended to raise rates by 25 basis points.
The reports come as some 86 per cent of global investors say they now expect Europe to slump into recession in the next 12 months, up sharply from 54 per cent that were forecasting such a scenario last month, according to Bank of America’s latest monthly fund manager survey.
A record 79 per cent of the 293 panellists with $800 billion (€781 million) of assets under management that participated in the survey said they believe the world economy would weaken over the coming year, with close to half of them forecasting an outright recession. The keenly-followed monthly gauge of investor sentiment dates back to 2003.
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Almost 70 per cent of European investors think that “demand destruction” – a phenomenon where high prices prompt households and businesses to hold off spending – will be the dominant economic theme over the coming months, according to the survey.
This will lead to falling inflation and a peak in central bank hawkishness on rates, they said. Indeed, while 32 per cent of investors said last month that central banks were the greatest risk facing financial markets, the figure had fallen to 17 per cent this month.
The ECB is grappling with fears of an economic downturn and political instability in Italy, one of the region’s most indebted countries, where prime minister Mario Draghi has lost the support of a key party, prompting talk of an early election.
The debate between the 25 members of the central bank’s governing council, which begins on Wednesday, is expected to reflect mounting concerns that they are behind the curve on inflation, which rose to a record high for the euro zone of 8.6 per cent in the year to June.
The increase would be the first by the central bank in more than a decade, and a 50 basis point rise would end an eight-year experiment with negative rates. The last time the ECB raised rates by 50 basis points was in June 2000.
“The case for a 50 basis point rate rise has been there for a while and arguably the ECB should have done it long ago,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
Some ECB council members – including those from Baltic countries where inflation is close to 20 per cent – have broken ranks to publicly call for a 50 basis point rate rise on Thursday.
After the ECB council met in Amsterdam last month, its president Christine Lagarde said it “intends” to raise interest rates by 25 basis points at its July meeting and could then raise them by a bigger amount at its September meeting if inflation stayed high. When asked at the post-meeting press conference why the ECB seemed to rule out a 50 basis point rate rise in July, Ms Lagarde said: “It is good practice, and it is actually often done by most central banks around the world, to start with an incremental increase that is sizeable, not excessive and that indicates a path.”
But at an ECB conference a few weeks later she said there were “clearly conditions in which gradualism would not be appropriate” and which would require it “to withdraw accommodation more promptly to stamp out the risk of a self-fulfilling spiral”.
– Copyright The Financial Times Limited 2022
