ECB preview: will the bank be persuaded that it’s done enough on the rate front?

The ECB has raised its main refinancing rate from 0% last summer to 4.25% at its last meeting in July. Has it beaten the biggest surge in inflation for a generation, or does it need to go just one more to be sure?

Doubts over whether the central bank will raise interest rates for the 10th consecutive time have intensified amid widespread signs of an impending economic downturn, including weaker business confidence, and falling German industrial production. But this would be outside the main remit of the ECB which is to keep a lid on inflation. Derivatives markets are pricing only about a 35% chance of the ECB raising its rates on Thursday.

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European Central Bank

European Central Bank is due to decide on its latest interest rate decision come Thursday this week. The outcome is reported as resting on a knife edge, having already raised its main refi rate from its 0% last summer to 4.25% at its last meeting, which was back in July. It's beaten the biggest surge in inflation for a generation. Or has it done enough to curb inflation? This is the big quandary that's producing that knife edge there at the moment.

The ECB raising interest rates

Let's take a look in some more detail about what's going on here. Doubts over whether the Central Bank will raise rates for the 10th consecutive time have intensified amid widespread signs of an impending economic downturn, including weaker business confidence and falling German industrial production. But this will be outside the main agreement, of course, for the ECB, which is to keep a lid on inflation.

It does have that target of on or around 2%. Derivatives markets are pricing only around about a 35% chance of the ECB raising interest rates come Thursday. The refinancing rate is expected there to remain at 4.25%. No change either for the deposit facility rate and marginal lending rate forecast respectively at three and three quarter and 4.5%.

EUR/USD

Now, clearly, this is an event which is going potentially to move the EUR/USD. Let's take a look at what's happened as we saw the trade get underway today. A little bit of an uplift against that weaker USD currently trading at 107.29. I'm not completely convinced this is a move which is going to be sustained. As I said, a lot of water still has to pass out of the bridge before that decision on Thursday.

EUR/GBP

I'm going to be waiting to see just what's happening with that. Of course, the Fed and the Bank of England also due to report on interest rates in the not too distant future. This is the EUR/GBP, which is the euro down against that slightly stronger sterling in the session in today's trade. Most economists expect the ECB to include a weaker outlook for growth and a slight increase in inflation expectations for this year and next.