ECB may raise interest rates to record high

The European Central Bank (ECB) will meet today to decide whether to continue raising interest rates or pause as the economy falters.

The ECB is in a dilemma. After nine consecutive interest rate hikes, inflation in Europe is still double its 2% target and shows no sign of returning to that level for the next two years. Meanwhile, rising interest rates around the world and China’s loss of growth are putting pressure on the global economy.

The ECB will meet today to decide whether to raise its benchmark interest rate further. If it is raised by 25 basis points (0.25%), the benchmark interest rate will rise to 4% - the highest since 1999 - when the euro was launched. Just 14 months ago, the rate was at a record low of -0.5%.

Analysts and investors had been leaning toward a pause. But earlier this week, Reuters reported that the ECB would raise its inflation forecast for next year to above 3%. That would make the odds of a rate hike higher.

Policymakers view the ECB’s forecasts as a key indicator of whether inflation is moving toward its target. “Inflation momentum is still too strong to stop raising interest rates,” said Piet Haines Christiansen, an economist at Danske Bank.

The ECB is also expected to cut its growth forecasts for this year and next today, further cementing economists' belief that the central bank cannot raise interest rates. "With core inflation showing signs of cooling and the growth outlook deteriorating rapidly, there is no reason to tighten," said Dirk Schumacher, an economist at Natixis.

Next week, the US Federal Reserve (Fed) will also hold a policy meeting. The market is currently predicting that the Fed will keep interest rates unchanged this time. The Fed started the process of raising interest rates earlier and also more aggressively than the ECB. The reference interest rate in the US is currently around 5.25-5.5% - the highest since 2001.

Ha Thu (according to Reuters)

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