But it must at the same time be careful not to aggravate the economic crisis which is raging in a euro zone already weakened by energy problems and political turbulence in Italy.

The ECB has already announced in advance its intention to raise its rates.

The only question is how big will this hike be: just a quarter of a percentage point or, as a growing number of market pundits believe, 50 basis points straight?

If this last option is chosen, it would mean the end of the era of negative rates that began in 2014.

A rate of -0.5% is currently applied to part of the bank deposits dormant at the ECB, as an incentive to distribute credit and therefore help to drive up inflation.

Inflation at the top

However, inflation in the euro zone continues to rise under the combined effect of the post-Covid recovery, tensions in supply chains and the energy crisis linked to the Russian offensive in Ukraine.

The inflation rate reached 8.6% in June over one year and is expected to rise further in the coming months.

Market players are betting on a "resolute" action by the ECB, as evidenced by the recent rise of the euro against the dollar, after having evolved at parity.

Why "flounder with a 25 basis point increase and wait for September to get it out of negative territory?" asks Antoine Bouvet, rate specialist at ING.

It is "difficult to imagine spending the summer with negative rates when inflation in the euro zone will continue to rise", adds Franck Dixmier, director of bond management at Allianz Global Investors.

The guardians of the euro will however have to manage this credit crunch with caution, at a time when fears of a new debt crisis are resurfacing in the wake of political instability in Italy.

The head of the Italian government Mario Draghi, former head of the ECB, finds himself close to the exit door after the defection on Wednesday of three major parties from his coalition, which could seal the fate of his government of national unity.

Rate spreads

To ward off a possible surge in borrowing rates that countries like Italy must pay to finance their debt, the ECB will also unveil Thursday the outlines of a new “anti-fragmentation” shield.

It was designed to smooth out the gaps between borrowing rates, or "spreads", between risk-free borrowing countries, such as Germany, and other more fragile ones.

The ECB argues that these "spreads" hinder the proper transmission of its monetary policy.

But strict conditions of use must be defined, the guardians of the euro not having the right to help governments budget.

But "a self-inflicted political crisis in Italy is the textbook case where the ECB should not intervene," warns Frederik Ducrozet, chief economist at Pictet.

The pioneering United States

By raising the cost of credit, for the first time since 2011, the ECB will follow in the footsteps of other central banks around the world.

The US Fed has raised interest rates since March and its range for the federal funds rate, now between 1.5 and 1.75%, could be raised by 75 basis points at the end of July.

In the euro zone, the gas crisis complicates the task of the ECB.

Uncertainties over the supply of gas from Russia, since the start of the war in Ukraine, could plunge the euro zone into recession in the event of a sudden halt in deliveries by Moscow.

Raising rates too quickly would aggravate the situation.

All of Europe is waiting in this context to know if the Nord Stream 1 gas pipeline will restore its deliveries on Thursday, after more than 10 days of complete interruption for work.

The European authorities are preparing at best for a sharp decline.

© 2022 AFP