Like the US... Will the ECB also take a 'Giant Step'? (Comprehensive)

[Asia Economy Reporter Yujin Cho] As the inflation rate in the Eurozone (19 countries using the euro) continues to hit record highs, the possibility is growing that Europe, following the United States, will implement a so-called ‘giant step’ by raising its benchmark interest rate by 0.75 percentage points at once.

According to Bloomberg and others on the 31st (local time), major U.S. banks such as Goldman Sachs, JP Morgan, and Bank of America (BoA) predict that the European Central Bank (ECB) will take a giant step at the meeting scheduled for the 7th to 8th of next month. Greg Fuzesi, an economist at JP Morgan, said in a memo to investors that day, "With the release of August consumer price data, there are increasing calls among monetary policy meeting participants for a stronger response," adding, "We expect a 0.75 percentage point hike at next week’s meeting."

Bloomberg reported, "According to interest rate derivatives, the financial market is pricing in a 1.25 percentage point increase in the ECB’s benchmark interest rate by October." This means one hike of 0.5% and another of 0.75%. The ECB also surprised markets by implementing a big step (0.5 percentage point hike) in July, the first rate increase in 11 years.

The ECB is accelerating its tightening because inflation is soaring uncontrollably. Eurostat, the statistical office of the European Union (EU), preliminarily estimated that consumer prices in the Eurozone rose 9.1% year-on-year in August. This is the highest increase in 25 years since related statistics began. The Eurozone’s consumer price inflation has set new record highs for ten consecutive months since November last year.

Joachim Nagel, President of Germany’s Bundesbank, emphasized that "it is necessary to act decisively at the next monetary policy meeting to counter inflation," adding, "a strong rate hike is needed this month."

There is a prevailing forecast that the inflation rate, which has already surpassed 9%, will soon reach double digits. Christoph Weil, an economist at Commerzbank, said, "Consumer prices may rise further this month (September)," and "As a result, the pressure on the ECB to continue raising rates will remain high." With no signs of easing in energy and food prices, along with a 5% increase in service costs and non-energy industrial goods, ECB policymakers are facing deep concerns.

Bloomberg reported that the consensus is that the current inflation rate requires sufficient rate hikes to bring it back to the target range of around 2% at the fastest pace since the introduction of the euro.

Meanwhile, the U.S. Federal Reserve (Fed) is also expected to take its third giant step at the monetary policy meeting scheduled for the 20th to 21st. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market reflects a 70.5% probability that the Fed will raise rates by 0.75 percentage points in September. The probability of a 0.50 percentage point hike is about 29.5%.

Loretta Mester, President of the Federal Reserve Bank of Cleveland, said in a speech in Dayton, Ohio, that she expects the U.S. benchmark interest rate to rise above 4% within the next few months. She stated, "I do not expect the Fed to cut the federal funds rate next year," and "It is essential to raise rates to a level above 4% by early next year." This statement aligns with remarks made last week by Fed Chair Jerome Powell.

This content was produced with the assistance of AI translation services.