ECB sets course on Thursday for rate hike in July, with half point increase still possible

ECB’s projections are likely to show inflation won’t drop below the 2% target again through 2024

ECB president Christine Lagarde has portrayed Russia’s invasion as a pivotal moment that may prove to be a “tipping point for hyper-globalisation”.

The European Central Bank will begin a new era of monetary policy this week as officials complete their pivot to confront the threat of inflation running out of control.

Armed with new forecasts and with prices rising at a record pace, president Christine Lagarde and her colleagues will end trillions of euros of asset purchases and cement a path to exiting eight years of negative interest rates. 

Investors now speculate that an end to sub-zero policy could materialise as soon as July.

While consumer prices surging at more than four times the 2% goal are alarming enough, it’s the economic outlook beyond the immediate term that will underpin the ECB’s shift. 

Its projections are likely to show inflation won’t drop below the target again through 2024.

Those new quarterly numbers will be the first to fully account for Russia’s war in Ukraine, which no matter when it ends will have lasting effects on energy and food costs. 

The new reality will show that the ECB’s criteria for rate liftoff are finally met.

“With the forecast, they can show that their three conditions are fulfilled” to start removing stimulus, said Karsten Junius, an economist at Bank J Safra Sarasin in Zurich. 

They can really close the old chapter and face the new threats. 

Those challenges stand in stark contrast to the picture pre-pandemic, when officials fought sluggish consumer-price growth that fell well short of their target — a situation ECB researchers blame on past crises, demographics, globalisation, and digitisation.

The turnaround has been dramatic. Inflation now tops 8%, driven by energy costs and logistics snarls. 

Even when those issues are overcome, the “disinflationary dynamics of the past decade are unlikely to return”, according to Ms Lagarde.

Economists see the 2024 inflation projection coming in at 2% — up from just shy of that level in March. 

That would satisfy the ECB’s requirement that price growth not only quickens for a brief period, but remains elevated over the medium term.

The upshot will be a first rate increase in more than a decade in July, after net bond-buying is wound down. 

Fifty basis-point hike

By how much is the subject of vigorous debate within the governing council, where some want a 50 basis-point hike.

Money-market wagers on Tuesday crossed half the way toward calling that officials will begin with a move of that size on July 21.

While that would chime with the forecast of Bank of America, which predicts two half-point steps in the third quarter, most economists see only quarter-point moves at the July and September decisions.

Ms Lagarde has portrayed Russia’s invasion as a pivotal moment that may prove to be a “tipping point for hyper-globalisation”, while speeding up the green transition — both implying more durable inflation pressure. 

• Bloomberg