The European Central Bank is poised to start raising interest rates this week despite fears that doing so could tip some countries back into recession.
After nearly two years with rates at a record low of 1%, the ECB is expected to announce a quarter-point rise on Thursday. The Bank of England’s monetary policy committee (MPC) will announce its rate decision the same day, and is expected to hold at 0.5% for the 25th month.
Jean-Claude Trichet, president of the ECB, said last month that the bank would show a “posture of strong vigilance” against rising inflation, which has climbed to 2.6% across the eurozone because of soaring commodity prices.
Europe is experiencing a two-speed recovery, with the robust growth of Germany contrasting sharply with the weak performance of debt-laden Spain and Portugal.
David Owen, chief European financial economist at Jefferies, the investment bank, said a rate rise would be a policy mistake that could push Spain back into recession. “There remain significant tail risks,” he said. “The Spanish private sector remains highly leveraged and very exposed to even what may appear to be modest rises in the policy rate.”
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The ECB’s approach to inflation contrasts strongly with that of the Bank of England. Inflation as measured by the consumer prices index jumped to 4.4% in February, but many MPC members remain wary of raising the cost of borrowing while Britain’s recovery remains weak.
Mark Capleton, a strategist at Société Générale, said: “The MPC seems to regard inflation as a window to be looked through, while the ECB sees it as a wall to be knocked down.”
Most City economists expect the MPC to raise rates to 1% by the end of the year. A first move may come next month, though Middle East unrest and the weakness of Britain’s services and consumer sectors may postpone it to August. The shadow MPC, a panel of independent economists, voted 5-4 at its last meeting to keep rates on hold.