European Central Bank Is Set to Raise Interest Rates Again

The European Central Bank is expected to impose a large interest-rate increase on Thursday, as policymakers try to quell the region’s record-high inflation.

Analysts and traders predict that the central bank, which sets monetary policy for the 19 countries that use the euro, will raise interest rates by three-quarters of a percentage point, matching the previous increase last month. After a slow start in raising rates — its July increase was the first in more than a decade — the bank said it had rapidly tightened its policy stance as inflation has proved worse and more persistent than the bank expected.

Consumer prices rose 9.9 percent on average in the eurozone in September from a year earlier, the fastest pace on record, driven by energy and food prices. This was “far too high,” Christine Lagarde, the president of the European Central Bank, said in a speech this month.

The challenges facing central bankers have increased in the past few months as lawmakers have taken more steps to protect households and businesses from rising prices. Central bankers have warned that fiscal policy must not work at odds with monetary policy. Britain has become an international example of this risk. Last week, Liz Truss resigned as prime minister after her tax cuts provoked turmoil in financial markets.

European governments have been in disagreement about how they should respond to rising energy prices, with richer countries taking advantage of their better fiscal positions to spend more heavily. Germany recently announced a €200 billion ($201 billion) aid plan for its households, businesses and industries.

“Fiscal policy needs to be carefully calibrated to country-specific circumstances to protect the most vulnerable groups from the cost-of-living crisis while preserving debt sustainability and without adding to inflationary pressures,” Ms. Lagarde said in the speech.

Central bankers’ ability to control inflation has been severely tested over the past year. There was once an expectation that high inflation would pass quickly, especially when it was primarily driven by high and volatile energy prices that policymakers couldn’t control. But economies have faced a series of economic shocks that have spurred central banks into action.

While inflation is far above the central bank’s 2 percent target, analysts are already questioning how high eurozone policymakers will be able to raise interest rates as a recession looms.

The bank’s deposit rate, which is what banks receive for depositing money with the central bank overnight, was raised to 0.75 percent last month. It’s an extremely loose policy stance compared with those of central banks in many other countries. The U.S. Federal Reserve’s policy rate target is between 3 and 3.25 percent. The Bank of England’s main policy rate is set at 2.25 percent.

Officials at the European Central Bank have said they need to reach at least a neutral rate, where policy is neither stimulating nor restricting economic growth, but estimates of what that neutral rate is vary and the central bank hasn’t revealed its own estimate. Ms. Lagarde said earlier this month that the bank expected to raise rates “over the next several meetings.”

Klaas Knot, the president of the Dutch central bank and a member of the E.C.B.’s governing council, said this month that the central bank had not reached the neutral rate, and that it still needed to tighten policy and show more resolve. Interest rates were being “guided onwards and upwards” for the next few months, he said, and wouldn’t abruptly stop.

The future path of inflation is increasingly uncertain, though the rate is expected to stay above the central bank’s target for the next two years. Europe’s natural gas prices, which have heavily influenced the inflation rate, have fallen recently as the weather has stayed relatively warm and governments have succeeded in filling storage facilities. But prices are still double what they were a year ago, and analysts say there remains a risk that prices could rise sharply again. Prices are higher on futures contracts for the winter, when stockpiles are expected to dwindle.

Policymakers are also watching closely for how much businesses are raising their prices and workers are demanding higher wages in response to high inflation. For now, these second-round effects appear contained but it can be very difficult to control inflation once expectations set in that prices will keep rising.

One source of comfort for policymakers might be the euro. On Wednesday, it climbed back above $1 for the first time in more than a month. Officials had been alert to how the weak euro has exacerbated inflationary pressures by increasing the cost of imports.