Markets are currently pricing in a near-certain probability that the European Central Bank will raise its benchmark deposit rate by at least 25 basis points.
The deposit rate currently sits at 2%, with market pricing reflecting roughly a 98% chance of an increase at the ECB’s upcoming meeting.
Holger Schmieding, chief economist at Berenberg, has come out strongly against the move, warning it could have serious consequences for the eurozone economy.
Schmieding said Europe’s key “big three” economies — Germany, France and Italy — have been weakened by a recent spike in energy costs, creating a stagflationary environment.
He warned that the ECB would be making “a big mistake” by hiking rates into that kind of economic weakness, risking a continent-wide recession.
The inflation pressures prompting the anticipated hike are largely driven by surging energy prices tied to ongoing Middle East conflict and supply disruptions.
Critics argue that raising interest rates does almost nothing to address inflation rooted in external supply shocks, since higher borrowing costs cannot increase oil production or ease geopolitical tensions.
What higher rates would do, economists caution, is make borrowing more expensive for businesses and consumers already struggling with elevated energy bills.
History offers a cautionary example: then-ECB President Jean-Claude Trichet raised rates twice in 2011, in April and July, to fight inflation driven by similar pressures.
Within months of those hikes, the eurozone sovereign debt crisis spiraled out of control, economic growth collapsed, and the ECB was forced to fully reverse course.
The parallels to the current situation have unnerved a number of market watchers who see the ECB repeating a well-documented policy error.
For investors, the central question is whether this anticipated tightening represents genuine inflation discipline or a damaging miscalculation at a fragile moment for the European economy.
