# ECB weighs bigger rate hike with safety net for indebted countries
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-07-19
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: ECB Considers 50bp Rate Hike to Tame Inflation: Sources
Meta Description: Get the latest news on European Central Bank considering a 50 basis points rate hike due to record-high inflation and bond market support for indebted
URL: https://financedigest.com/ecb-weighs-bigger-rate-hike-with-safety-net-for-indebted-countrieshtml

![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-07-19t085338z1lynxmpei6i0b1rtroptp4ecb-policy-1736815574294-compressed.jpg)

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) -European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.

To cushion the impact of the higher borrowing costs, policymakers are also expected to announce a deal to help indebted countries like Italy on the bond market. The deal will require they stick to [European Commission rules](https://www.financedigest.com/ftx-collapse-shows-urgent-need-to-finalise-eu-crypto-rules-says-european-commission.html "FTX collapse shows urgent need to finalise EU crypto rules, says European Commission") on reforms and budget discipline, the sources said.

The ECB is set to deliver its first [rate hike](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike") in more than a decade on Thursday against a difficult economic backdrop exacerbated by the war in Ukraine. Inflation is high and rising while [economic growth has slowed and a political](https://www.financedigest.com/uae-plans-long-term-economic-ties-with-israel-despite-political-strains.html "UAE plans long-term economic ties with Israel despite political strains") crisis in Italy is keeping investors on edge.

That dynamic creates a balancing act for the ECB, between raising [rates to curb price growth](https://www.financedigest.com/u-s-job-growth-powers-ahead-unemployment-rate-at-3-4.html "U.S. job growth powers ahead; unemployment rate at 3.4%") and ensuring that the most indebted of the euro zone’s 19 member countries don’t run into financial trouble as a result.

The sources, who spoke on condition of anonymity because the deliberations are private, said the discussion about whether to increase rates by 25 or 50 [basis points](https://www.financedigest.com/traders-ramp-up-bets-on-75-basis-point-ecb-sept-hike-bond-yields-jump.html "Traders ramp up bets on 75 basis-point ECB Sept hike, bond yields jump") was still wide open.

Other major [central banks have been raising rates](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") in bigger increments, such as 75 or even 100 basis points, raising the pressure on the ECB to do more.

But the risk of a recession in the [euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows"), particularly if Russia turns off the taps to natural gas supplies, made some ECB governors more cautious about choking growth, the sources said.

An [ECB spokesperson declined to comment](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations"), citing the bank’s pre-meeting quiet period.

The [euro jumped on Tuesday after Reuters first reported that a 50 bp hike](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") was under discussion, and was last up 0.9% against the dollar at $1.0232. The single currency briefly fell below parity last week.

Yields on [euro zone](https://www.financedigest.com/euro-zone-recovery-gathers-pace-allays-fears-of-recession-pmi.html "Euro zone recovery gathers pace, allays fears of recession-PMI") government bonds also rose, with Germany’s two-year benchmark now yielding 1.329%.

The [ECB said on June 9 after its last meeting](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") that it would raise interest rates gradually, probably by 25 basis points in July with a bigger move possible in September.

But [ECB chief](https://www.financedigest.com/ecb-should-raise-rates-at-steady-pace-chief-economist-says.html "ECB should raise rates at steady pace, chief economist says") Christine Lagarde later said there were “clearly conditions in which gradualism would not be appropriate.

[Euro zone inflation](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") hit 8.6% last month and is expected to keep rising until the autumn, driven by soaring fuel and food prices. It is then seen slowly [falling back but could hold above the ECB’s](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") 2% target through 2024, raising the risk that wages will follow, setting off a hard-to-break wage-price spiral.

A Reuters poll of economists late last week found all but one expected the [ECB to stick to its guidance and raise its deposit rate](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets") by 25 basis points this week, though a narrow majority said it should go for a bigger half-point hike.

That the [ECB is even considering a half-a-percentage-point hike](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") marks a turnaround after it insisted for weeks that a 25-basis-point move was the most adequate. It deliberations follow a hefty 75 bps rise by the U.S. Federal Reserve [last month](https://www.financedigest.com/fintech-trends-to-look-out-for-during-the-last-six-months-of-2019.html "Fintech trends to look out for during the last six months of 2019"), which also ran against itw own guidance.

[STRINGS ATTACHED](https://www.financedigest.com/onkho-delivers-free-no-strings-attached-compliance-workflow-solution-for-accountants.html "Onkho Delivers Free ‘No Strings Attached’ Compliance Workflow Solution for Accountants ")

Rate setters will also announce a new bond-buying scheme on Thursday, aimed at capping member countries’ borrowing costs when they are deemed to be out of sync with economic reality – as it happened in early June in Greece, Italy, Spain and Portugal.

This programme was now seen as even more crucial as Mario Draghi’s government in Italy hung by a thread, raising the chances of early elections at which far-right Brothers of Italy might [emerge as the biggest party according](https://www.financedigest.com/how-leadership-helps-emerging-entrepreneurs-according-to-dr-parwiz-daud.html "How Leadership Helps Emerging Entrepreneurs, According to Dr. Parwiz Daud") to recent polls.

Such [political turmoil](https://www.financedigest.com/britains-political-and-market-turmoil-2.html "Britain’s political and market turmoil") in Italy would likely trigger a sharp spike in the country’s bond yields.

The ECB is likely to make help conditional on countries meeting targets set by the [European Commission for securing money from the European Union Recovery](https://www.financedigest.com/european-shares-end-higher-on-china-recovery-optimism.html "European shares end higher on China recovery optimism") and Resilience Facility, the sources said.

They added countries will also be expected to stay within the Stability and Growth Pact’s budgetary constraints when they are reinstated [next year after a suspension for the pandemic](https://www.financedigest.com/living-with-covid-where-the-pandemic-could-go-next.html "‘Living with COVID’: Where the pandemic could go next"), the sources said.

Some policymakers had wanted to involve the European Stability Mechanism, the [euro zone’s](https://www.financedigest.com/euro-zone-likely-heading-into-mild-recession-pmi.html "Euro zone likely heading into mild recession-PMI") bailout fund created in the wake of the debt crisis a decade ago, but this option was now likely to be discarded, the sources said.

The ESM is not a [European Union institution but an intergovernmental organisation owned by euro](https://www.financedigest.com/european-governments-spend-half-a-trillion-euros-on-energy-crisis-report.html "European governments spend half a trillion euros on energy crisis – report") zone countries in proportion to the size or their economy and population, making Germany, France and Italy the biggest shareholders.

The sources stressed that any final decision on when to buy [bonds would be taken by the ECB’s](https://www.financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-polluters.html "ECB can cut carbon footprint by shedding bonds of biggest polluters") own Governing Council.

The ECB accelerated work on the new scheme in mid-June after a sudden flare-up in the bond market yields and premiums paid by peripheral countries as investors [priced](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") in the end of ECB asset purchases and the start of its rate-hiking cycle.

(Editing by Catherine Evans and Frank Jack Daniel)


---
This blog is powered by Superblog. Visit https://superblog.ai to know more.
---