ECB may raise interest rates to record highs

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 the 2% target and shows no sign of returning to that level in the next two years. Meanwhile, rising interest rates worldwide and China’s loss of growth are putting pressure on the global economy.

The ECB will hold a policy meeting today to decide whether to continue raising its benchmark interest rate. If it is raised by another 25 basis points (0.25%), the benchmark interest rate here will reach 4% - the highest since 1999 - when the euro was launched. Just 14 months ago, this rate was at a record low of -0.5%.

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

Policymakers see 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, further underscoring economists' belief that the central bank cannot afford to raise interest rates. "With core inflation showing signs of cooling and growth prospects 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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