For weeks, policymakers at the European Central Bank have all but declared that the bank would raise interest rates by half a percentage point on Thursday, following through on plans laid out last month to squash high inflation in the eurozone.<\/p>\n
But in the past few days, traders have reduced their bets on how high the central bank and its other major peers will raise interest rates this year in the fallout of the collapse of California-based Silicon Valley Bank and amid worries about the big Swiss lender Credit Suisse. Analysts have started to speculate that the U.S. Federal Reserve won\u2019t be able to proceed as expected with higher interest rates as markets remain jittery about the health of many banks, particularly U.S. regional ones, and their ability to withstand higher rates. In Europe, some analysts, such as those at Barclays, have said the European Central Bank may approve a smaller, quarter-point increase Thursday.<\/p>\n
The eurozone has little direct exposure to Silicon Valley Bank, but banking worries got much closer to home on Wednesday, when Credit Suisse\u2019s share price plunged to a record low after the Swiss bank said it found \u201cmaterial weakness\u201d in its financial reporting controls and its largest shareholder balked at injecting more funds for regulatory reasons. Early on Thursday, Credit Suisse said it would borrow up to 50 billion Swiss francs, or about $54 billion, from Switzerland\u2019s central bank and buy back some of its debt. Hours later shares in Credit Suisse jumped when trading began, rising as high as 40 percent.<\/p>\n
The European Central Bank is the first major central bank to set monetary policy since banking worries gripped financial markets a week ago, and its decision could be a gauge on how far the reverberations are expected to spread.<\/p>\n
Last month, policymakers at the E.C.B. said they expected to raise rates by half a point at this week\u2019s meeting, pushing the deposit rate up to 3 percent, because they were committed to stamping out persistent inflationary pressures even as the inflation rate appeared to have peaked. Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 8.5 percent in February, down slightly from January\u2019s rate, and down from a peak of 10.6 percent in October.<\/p>\n
Looking beyond the headline rate of inflation for the eurozone as a whole, the details were more concerning to some policymakers. Some major economies, including France and Spain, were reporting higher inflation rates. Core inflation, which strips out volatile energy and food prices and is used to measure how embedded inflation is in an economy, also rose last month.<\/p>\n
Lower wholesale energy prices in Europe will help push inflation toward the central bank\u2019s 2 percent target but policymakers are focused on so-called underlying inflation, which will show whether inflationary pressures are still building and make it hard to meet the inflation target on a sustainable basis. Measures such as wage inflation and services inflation are being watched closely.<\/p>\n
\u201cThe current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting,\u201d Philip Lane, the bank\u2019s chief economist said earlier this month. But \u201cthe exact calibration beyond March should be determined by incoming data and staff economic projections, he added. New quarterly staff forecasts will be published on Thursday.<\/p>\n
As the central bank restricts monetary policy more tightly and gets closer to halting rate increases, there are growing signs of division among the 26-member Governing Council.<\/p>\n
Last week, Ignazio Visco, the governor of the Bank of Italy, publicly criticized his fellow policymakers that had been expressing their views about where interest rates might go.<\/p>\n
\u201cWe have agreed to decide \u2018meeting by meeting\u2019, without \u2018forward guidance,\u2019\u201d he said. \u201cThis is why I don\u2019t appreciate statements made by my colleagues on future and extended increases in interest rates. I don\u2019t, we don\u2019t, know enough.\u201d<\/p>\n