European Central Bank policymakers will decide whether to raise interest rates by a larger-than-expected 50 basis points on Thursday at their meeting to prevent an unprecedentedly high inflation, as per the sources.
The sources say that policymakers are working on a plan to provide bonds for indebted countries like Italy so long as they follow European Commission reforms and budget discipline rules.
Because of the secrecy of the discussions, two sources with whom Reuters spoke – on condition of anonymity – added that it’s not decided yet whether rates will go up by 25 or 50 basis points.
In order to contain rapidly rising inflation, other major central banks have been raising rates in bigger increments, such as 75 or even 100 basis points, so the ECB is under pressure to do more.
Nonetheless, a looming recession in the euro zone prompted some governors to be cautious about curbing growth.
The ECB’s spokesman, as part of the bank’s pre-meeting quiet period, declined to comment.
After Reuters reported that a 50-bps rate hike was under consideration, the euro surged on Tuesday, closing up 0.9% against the dollar at $1.0232. Last week, the euro reached its lowest level in years.
Germany’s two-year benchmark yield has risen to 1.329%, as well as government bond yields in the euro zone.
On June 9, the ECB announced that it would raise interest rates gradually, by maybe 25 basis points in July and possibly more in September.
Later on the ECB chief Christine Lagarde said that there were “clearly conditions in which gradualism would not be appropriate”.
Last month, inflation in the Euro zone rose to 8.6% and is expected to keep rising in the coming months because of skyrocketing fuel and food prices. Following that, it is seen slowly falling back, but it could remain above the ECB’s 2% target through 2024, increasing the risk that wages will follow, setting off a wage-price spiral that will be hard to break.
The ECB is expected to raise deposit rates by 25 basis points this week, according to a Reuters poll of economists taken last week, though a narrow majority favored a bigger half-point hike.
A STRING IS ATTACHED
It’s been discussed for weeks whether strings should be attached to the ECB’s new bond-buying scheme to cap borrowing costs when countries are deemed to be out of sync with economic reality, sources said.
Officials will reportedly provide help on the condition that nations agree to spend money from the European Union Recovery and Resilience Facility and stay within the Stability and Growth Pact when they are reinstituted next year, the sources said.
The sources also said, some policymakers had wanted to use the European Stability Mechanism, established as a bailout fund after a decade of debt crises, but this option might now be discarded.
The ESM is not an institution of the European Union, but an intergovernmental organization in which the euro zone countries take on the most responsibility. France, Germany, and Italy, who are the biggest European Union economies, are the biggest shareholders.
When considering whether to buy bonds, the sources noted that the ECB’s Governing Council would have the final decision.
Following a sudden increase in bond market yields and premiums paid by Greece, Italy, Spain and Portugal as investors priced in the end of the ECB’s asset purchases and a rate hike, the ECB accelerated work on the new scheme in mid-June.