Sentiment:

Mostly Negative

12 Sep 2023 21:16:57

By Francesco Canepa

FRANKFURT, Sept 12 (Reuters) – The European Central Bank expects inflation in the 20-nation euro zone to remain above 3% next year, bolstering the case for a tenth consecutive interest rate increase on Thursday, a source with direct knowledge of the discussion told Reuters on Tuesday.

The ECB begins a two-day meeting on Wednesday, with persistently high inflation and rising recession fears pulling policymakers in opposing directions and keeping market expectations equally divided between a pause and another 25-basis-point hike.

An ECB spokesman declined to comment.

The ECB’s quarterly projections, set to be to presented to its Governing Council on Wednesday, will put inflation north of 3% in 2024, the source said, confounding expectations for a small cut.

The updated 2024 projection is well above the central bank’s 2% target and will be higher than the 3% forecast in June. It is also above the 2.7% seen in a Reuters poll of economists.

The source said the rate decision was still a close call and formal proposals for the meeting have not yet been presented.

But the closely watched 2024 figure adds to the case for a rate hike as it appears to confirm fears that it could be harder to bring down inflation than earlier thought.

The ECB has lifted its deposit rate to 3.75% from minus 0.50 in a span of 14 months, the fastest pace of tightening on record, all in the hope that it would arrest runaway price growth.

But both headline and underlying inflation remain above 5%, raising the risk that workers will start demanding bigger pay increases, especially because the labour market remains exceptionally tight.

While the ECB’s 2025 inflation forecast will see no fundamental change, this is not a major item in the debate for policymakers because of the poor accuracy of projections in recent years.

Growth on the other hand will be downgraded for this year and 2024, roughly in line with market expectations, the source said.

Economists polled by Reuters see euro zone growth at 0.6% this year and 0.9% in 2024.