Investors say further increase unlikely given near-stagnation of euro zone economy
With euro zone inflation running at more than twice its target and the Israel-Hamas conflict pushing up energy prices, ECB president Christine Lagarde is expected to make clear that rates are likely to stay at – or above – their current level for some time. Photograph: Julien Warnand/EPAThe European Central Bank is expected to halt the most aggressive series of interest rate rises in its history when policymakers meet in Athens this week.
“Only a month ago, the market had three full rate cuts priced in for the ECB next year, but now it is pricing in slightly more than two,” said Veit. “There are still a lot of risks for inflation out there and it is too early to say exactly how soon the rate cuts will start.” Ms Lagarde said this month that price pressures remain “undesirably high”, despite dropping to nearly a two-year low of 4.3 per cent last month.
However, the conflict between Israel and Hamas has raised fears of wider tensions in the Middle East and pushed up oil and gas prices in recent weeks, which economists worry could keep inflation stubbornly high. “When rates are restrictive then the ability of firms to pass on those energy price increases into consumer prices is less,” Mr Lane told the Dutch newspaper Het Financieele Dagblad.
They say the ECB needs the flexibility to target the proceeds of maturing bonds more towards the debt of any country hit by a sharp divergence, or fragmentation, in financing costs compared to others.
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