The European Central Bank (ECB) is poised to start raising interest rates this week despite fears that this 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), which meets on the same day, is expected to stick at 0.5% for the 25th month.
Jean-Claude Trichet, president of the ECB, said last month that it 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 strongly with the weak performance of debt-laden Spain and Portugal.
David Owen, the chief European financial economist at Jefferies, the UK 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 the Bank of England policymakers. 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 the UK’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 this year. A first move could 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 economists, has voted 5-4 to keep rates on hold.