ECB moves to raise interest rates in its battle to control inflation

The European Central Bank is likely to raise interest rates again on Thursday, to press ahead with its battle to control inflation despite the eurozone entering a recession.

According to "AFP", analysts expected that European Central Bank policy makers would copy May's move by increasing lending costs by 25 basis points, bringing the closely watched interest rate to 3.50 percent.

This will be the eighth consecutive time that the Frankfurt-based institution has raised the interest rate since last July, when it launched an unprecedented campaign to tighten monetary policies after the Russian war in Ukraine led to a rise in energy and food costs.

Inflation in the eurozone slowed to 6.1 per cent year-on-year in May from a peak of 10.6 per cent in October, showing the effect of the ECB's efforts.

But although the bank's inflation target of 2 percent is still out of reach, policy makers stressed that it is too early now to abandon raising interest rates, which indicates that the rate hike will continue in the coming months.

European Central Bank President Christine Lagarde said earlier this month that interest rates this month were "close to the appropriate level" but that "we have to keep increasing them".

The scene appears different in the United States, where the Federal Reserve is expected to stop raising rates tomorrow, after increasing them ten times in a row, while following up on the repercussions of tightening on the real economy.

Like central banks around the world, the European Central Bank must balance raising lending costs to dampen demand, rein in inflation and avoid causing a deep economic slowdown.

Data revised last week showed that the economy of the 20-country eurozone contracted by 0.1 percent for two consecutive quarters at the end of 2022 and early 2023, which is consistent with the technical definition of a recession.

Although it is still mild, the sudden recession during the winter exacerbates fears that the region has not dealt with the repercussions of the Russian war as well as it thought, which raises doubts about the more optimistic forecasts for 2023.

"The eurozone economy has proven to be less resilient than was thought a few weeks ago," said Carsten Brzeski, an economist at ING Bank.

But he said the disappointing data did not deter the European Central Bank at a time when it was still very focused on reducing inflation.

Jack Allen-Reynolds, an economist at Capital Economics, said he expected the ECB to "hint" at an additional 25 basis point increase in July and stress that rates will remain high "for a long time".

Much will depend on the ECB's latest economic forecasts to be revealed on Thursday.

Observers expected negligible changes from previous expectations, which exclude the return of inflation to the rate set as a target before 2025, when it is likely to finally record 2.1 percent.