REUTERS/Issei Kato/ File photo
Just a quarter-point of interest-rate hikes is all that separates the European Central Bank’s two key options at this week’s decision, and yet few would envy Christine Lagarde’s task.Officials are also contending with euro weakness, spurred by spillovers from aggressive tightening in the US — and they know that any ECB move to offset that by raising borrowing costs erodes the fiscal stability of weaker members such as Italy.
“German manufacturers are already shutting up shop because of the high costs,” said Sarah Hewin, head of Europe and Americas Research at Standard Chartered Bank Plc. “For the ECB, this big conflict between tackling higher and higher inflation in the face of an inevitable recession is very difficult.”
A 75 basis-point step would match the Fed’s most recent pace, but the nature of Europe’s shock is different. Despite similar rates of price increases, a supply squeeze is the continent’s predominant driver, whereas demand is stronger in the US. The integrity of the currency area is also a worry. Concern is focused on Italy, where this month’s election could install a government led by Giorgia Meloni, whose party’s post-fascist roots have unsettled investors.