European Central Bank expects to raise interest rates despite fears of slowdown

European Central Bank expects to raise interest rates despite fears of slowdown

The European Central Bank is expected to raise interest rates for the second time this year on Thursday in a risky attempt to cool inflation without driving the energy-hungry economy into recession.

At a meeting in Frankfurt, Germany, the bank’s board of directors is likely to raise the key deposit rate by up to three-quarters of a percentage point, joining the Federal Reserve and other major central banks in a vigorous attack on rising prices, economists said. .

While higher interest rates are expected to slow the economy, easing pressure on prices, which have risen nearly 9 percent over the past year, they could also make the increasingly bleak economic outlook even bleaker.

“They are in an impossible situation,” said Eric Winograd, senior economist at AllianceBernstein in New York. “They are facing a shock to which no proper policy is responded.”

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European households and businesses will face a severe energy crisis this winter following Russia’s decision to stop supplying natural gas to Europe through the Nord Stream 1 pipeline. Moscow blames technical problems with its main pipeline related to Western sanctions over the war in Ukraine. But European officials view the move as punitive, intended to weaken opposition to the Russian invasion.

The euro area economy grew by 4.1 percent in the second quarter compared to a year earlier. But with natural gas prices soaring, some European industrial giants are looking to possible work delays and production cuts to save fuel.

The ECB raised its key deposit rate by half a point in July, its first hike in 11 years, and indicated that more such moves are ahead. But European policymakers have acted more slowly than the Federal Reserve and higher US interest rates have contributed to the euro’s decline of 16 percent against the dollar.

Even as traders forecast a significant rate hike, the euro fell lower against the dollar.

“The markets are looking beyond the ECB’s hikes and focusing on the looming deep recession that will engulf the eurozone. The ECB hikes will make that recession worse, not better,” Robin Brooks, chief economist at the Institute of International Finance, wrote on Twitter.

ECB President Christine Lagarde will explain the bank’s decision at a press conference later Thursday.

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