While higher interest rates are expected to slow the economy and thus ease pressure on prices, which are up almost 9 percent over the past year, they also could make an increasingly gloomy economic outlook even darker.
“They are in an impossible situation,” said Eric Winograd, senior economist with AllianceBernstein in New York. “They are confronting a shock to which there is no good policy response.”
European households and companies are facing a severe energy crunch this winter following Russia’s decision to halt natural gas deliveries to Europe via the Nord Stream 1 pipeline. Moscow blames technical problems with its main pipeline related to Western sanctions over the war in Ukraine. But European officials see the move as punitive, designed to weaken opposition to the Russian invasion.
The euro-area economy grew in the second quarter by 4.1 percent compared with one year earlier. But as natural gas prices soar, some of Europe’s industrial giants are eyeing possible work slowdowns and output reductions to conserve fuel.
The ECB raised its main deposit rate by a half-point in July, its first increase in 11 years, and it signaled additional such moves lay ahead. But European policymakers have moved more slowly than the Federal Reserve and higher U.S. interest rates have contributed to the euro’s 16 percent decline against the dollar.
Even as traders forecast a significant rate hike, the euro drifted lower against the dollar.
“Markets are looking through ECB hikes and focused on the looming deep recession that will engulf the Euro zone. ECB hikes will make that recession worse, not better,” Robin Brooks, chief economist for the Institute of International Finance, wrote on Twitter.
ECB President Christine Lagarde will explain the bank’s decision at a news conference later Thursday.