No pause in sight as ECB eyes next rate hike

FRANKFURT

The European Central Bank will almost certainly deliver another interest rate hike tomorrow, pressing ahead with its fight against inflation even as the eurozone slides into a recession.

Analysts predict that ECB policymakers will copy May's move and again raise borrowing costs by 25 basis points, taking the closely watched deposit rate to 3.5 percent.

It would be the Frankfurt institution's eighth-consecutive hike since last July, when it kicked off an unprecedented campaign of monetary tightening after Russia's war in Ukraine sent food and energy costs surging.

Eurozone inflation slowed to 6.1 percent year-on-year in May after hitting a peak of 10.6 percent last October, suggesting the ECB's efforts were having an impact.

But with the bank's two-percent inflation target still out of reach, policymakers have stressed it was too early to take the foot off the gas, hinting at rate hikes even beyond June.

ECB President Christine Lagarde said earlier this month rates were getting "closer to our cruising altitude", but "we need to continue climbing".

The picture is different in the United States where the Federal Reserve is expected to pause its rate-hiking cycle today after 10 consecutive increases, as it takes stock of how its tightening is feeding through to the real economy.

Like central banks around the world, the ECB has to walk a fine line between raising borrowing costs to dampen demand and tame inflation, without triggering a deep economic downturn.

Revised data last week showed that the 20-nation eurozone unexpectedly shrank by 0.1 percent for two straight quarters at the end of 2022 and the start of 2023, meeting the technical definition of a recession.

While still mild, the surprise winter recession adds to fears that the region did not cope as well as thought with the fallout from Russia's war, and casts doubt on more optimistic predictions for 2023.

"The eurozone economy has turned out to be less resilient than anticipated a few weeks ago," said ING bank economist Carsten Brzeski.

But he said the disappointing data were unlikely to deter the ECB as it remains laser-focused on bringing down inflation

Much will depend on the ECB's latest economic forecasts, set to be unveiled tomorrow.

Observers expected little change from the previous projections, which saw inflation only returning to target in 2025, at 2.1 percent.

ECB officials have also expressed concern about wages becoming an important driver of inflation, as workers use record-low eurozone unemployment to boost their demands for salary increases in order to compensate for higher living costs.