The European Central Bank is preparing to raise interest rates for the first time in 11 years

The European Central Bank announced that it will raise interest rates in July and September to counter record inflation.

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FRANKFURT, Germany – The European Central Bank’s Governing Council is expected to hold deep and frank talks on Thursday about the size of its first interest rate hike in 11 years, as the cost of living continues to rise in the region.

The euro It jumped to a nearly two-week high and eurozone government bond yields jumped on Tuesday morning after Reuters, citing a source, reported that the European Central Bank would consider whether to opt for a 50 basis point increase versus the 25 basis point already set. in.

“It is possible that the ECB will want the option of a 50 basis point hike due to something it saw in the unpublished inflation outlook data,” Mark Wall and his team at Deutsche Bank Research said in a recent note.

“It is also possible that the 50 basis point hike option will help negotiate the details of a powerful anti-retail tool,” he added, referring to the new stimulus plan due to be launched on Thursday that targets higher debt yields in peripheral countries. like Italy.

Details of this new anti-fragmentation tool will be closely watched and come at a critical moment as Italy faces off Another severe political crisis.

“While ECB President Lagarde is likely to stress the temporary nature of the instrument, given the exceptional circumstances in which the eurozone finds itself, she will also underscore the ECB’s determination to ensure the integrity of the monetary union, and thus attempt to evoke,” said Dirk Schumacher of Natixis at Research note “Whatever it takes” spirit “.

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“The fine line that President Lagarde has to walk here – also in light of the political situation in Italy – increases the risks of ‘misunderstandings’ and erratic market movements,” Schumacher added.

The new instrument and the significant rate hike will come as the European Central Bank deals with its primary task: price stability. Eurozone inflation record for June It came in at 8.6%, up from 8.1% in May, and German producer prices in June were 32.7% higher than a year earlier. However, there are signs that things can slowly improve.

Commerzbank analysts noted, “Intermediate commodity prices (excluding energy) have not risen as strongly as before. Here, the year-on-year comparison has fallen for the second month in a row, due, among other things, to somewhat lower metal prices.” When looking at recent data.

“As intermediate goods are ahead of consumer prices in this cycle, this raises hopes that the latter will also peak in the coming months.”

The economic outlook is highly uncertain at this point amid increasing risks of gas disruptions over the coming weeks. Europe is preparing for an extended shutdown of Russian gas supplies as maintenance continues on the Nord Stream 1 pipeline, which transports gas to Germany via the Baltic Sea.

Some fear that the suspension of delivery will be extended beyond the 10-day schedulehampering the preparations of winter supplies in the region.

“Importantly, the ECB may have to continue to tighten policy, even through a slight recession, if accelerating wages and persistently high energy prices raise inflation expectations,” Anatoly Annenkov said in a research note.

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“We believe that raising the interest rate at least to the lowest range of estimates of the natural rate (1-2%) makes sense in order to be in a better position next year to address inflation expectations,” he added.

CNBC’s Sam Meredith and Elliot Smith contributed to this article.

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