The European Central Bank is expected to raise rates today by at least 50 basis points, aiming to halt a rapid inflation rise that has already pushed euro-area prices to 9.1 percent in August.
With prices climbing sharply, traders anticipate the Governing Council may approve a quarter point increase, potentially marking the largest single rise in the history of the euro area.
The ECB has rarely moved by such a magnitude in the past. The only comparable instance occurred on December 10, 2008, but that step was a cut during a financial crisis after Lehman Brothers filed for bankruptcy.
In July, the ECB initiated a first half-point hike in eleven years, signaling a shift from emergency measures to a conventional policy stance.
Today the ECB’s policy rate stands at 0.50 percent, while the deposit facility remains at 0 percent, signaling that the euro zone has exited negative rates for now.
The central bank now appears somewhat less fearful of a permanent inflation spike or a sharp recession. Its focus is on cooling demand as supply constraints continue to push up prices amid strong demand.
Energy and food costs may stay elevated, and wage growth is expected to remain high after a long period of escalation.
Businesses face higher expenses from energy, raw materials, transportation, and logistics, costs that are increasingly passed through to goods and services.
Supply bottlenecks in industrial goods also contribute to higher prices, while a weaker euro further lifts energy and other material costs for importers.
Wage negotiations across euro-area countries, including Germany, the region’s largest economy, point toward strong pay increases as a response to tight labor markets.
Should Russia halt energy deliveries, production could stall, raising recession risks and prompting households to curb consumption to avoid soaring energy bills.
Gilles Moëc, chief economist at AXA Investment Managers, has shifted his stance and now anticipates a 75 basis point move in August, citing the rapid rise in consumer prices.
Some ECB Council members favor a 75 basis point move, while others argue for at least 50 basis points today.
Moëc notes the lack of a vocal soft-policy faction within the council, suggesting that opposition to decisive tightening is weak.
He adds that the message to price-setters—employers and unions—is clear: beyond the current slowdown, the ECB will curb demand if wage growth accelerates and risks a new persistent inflation regime materialize in the medium term.
Moëc also warns of a potential deep economic contraction ahead, suggesting that an economic downturn could be viewed as a path to lower prices rather than merely a side effect of tightening.
Another analyst, Konstantin Veit of Pimco, sees a 50 basis point rise as likely and expects further rate increases to be appropriate. He expects the policy rate to move toward neutral gradually, with 50 basis point hikes in October and December and 25 basis points in the following year as the cycle shifts from normalization to tightening.
The prospects for a 75 basis point increase remain on the table for some officials, according to Annalisa Piazza of MFS Investment Management. She notes that inflation may stay above target for longer and that the ECB might push the hiking cycle forward to avert a year-end recession in the euro area.
Piazza adds a baseline view in which key rates rise by 50 basis points in September, October, and December, with a later pause as the broader outlook is reassessed and a neutral rate near 1.5 percent is contemplated.
Upcoming quarterly macroeconomic projections from the ECB are expected to revise growth downward while inflation is revised higher.
In the June projections, inflation was seen at 6.8 percent with growth around 2.8 percent for 2022; the June baseline now points to inflation near 3.5 percent and growth close to 2.1 percent in 2023 and 2024, with similar growth rates projected for the subsequent year, reflecting a cautious but tightening stance across the euro area. [citation: ECB communications; market commentary]