ECB expects inflation to remain above 3% in 2024, boosting case for rate hike
The European Central Bank (ECB) expects inflation in the euro zone to remain above 3% in 2024, a source with direct knowledge of the discussion told Reuters on Tuesday. This is higher than the 2% target of the ECB and could bolster the case for a tenth consecutive interest rate increase on Thursday.
The ECB begins a two-day meeting on Wednesday, with policymakers facing a difficult decision between raising interest rates to combat inflation or pausing to avoid a recession.
The source said the ECB’s quarterly projections will show that inflation is expected to remain above 3% in 2024, higher than the 3% forecast in June. This suggests that the ECB will need to continue raising interest rates in order to bring inflation under control.
The ECB has already raised interest rates six times since December, taking the deposit rate from minus 0.50% to 0.25%. However, inflation remains stubbornly high, driven by rising energy and food prices.
The ECB is also facing concerns about a possible recession, as the war in Ukraine and rising energy prices weigh on economic growth.
The source said the ECB’s growth projections for 2023 and 2024 will be downgraded, but will still be positive. However, the downgrade could make policymakers more cautious about raising interest rates too quickly.
The ECB’s decision on Thursday is expected to be close, and it is possible that policymakers could decide to pause rate hikes in order to assess the impact of the war in Ukraine on the economy.
However, the source said that the ECB is likely to continue raising interest rates in the coming months in order to bring inflation under control.
The ECB’s decision will be closely watched by markets, and a rate hike could trigger volatility in the euro and other asset prices
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