The European Central Bank is likely to raise its key interest rate by a quarter of a percentage point on Thursday, declining to follow the Federal Reserve’s decision to take a break from the campaign to hike borrowing costs.
A year after the ECB started lifting rates, the euro area economy—comprising the 20 nations that use the single currency—has fallen into recession. But the inflation rate still tops 6%, remaining well above the ECB’s 2% goal. In the U.S., the comparable rate is 4%.
President Christine Lagarde will hold a press conference to explain the decision. Earlier this month, she said underlying inflation was still too strong—even though it was showing signs of moderating. The ECB slowed the pace of its increases in May, and another quarter-point increase will bring the total amount of tightening since July of last year to 4 percentage points.
The ECB started to turn the screws on rates four months after the Fed, one explanation for why inflation remains higher in Europe.
While energy prices in Europe have fallen substantially after spiking when Russia invaded Ukraine last year, services inflation and wage growth have strengthened. Similar to the U.S., unemployment is historically low in the euro region. That makes it easier for workers to bid up their pay, which risks further embedding faster price gains in the economy.
After the May decision, Lagarde highlighted the ECB’s divergence from the Fed. The ECB has “more ground to cover” and “is not pausing,” she said at the time.
Write to Brian Swint at brian.swint@barrons.com
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