Will the ECB step up its inflation-fighting efforts?

Good morning and welcome to Europe Express.

It’s rate-increase-day, with the European Central Bank governing council expected to up the interest rate from zero to 0.75 points. We’ll run you through what to expect from the Frankfurt conclave.

On the energy front, the plans for a windfall tax on energy companies are now public — though it is rather amusing how officials in Brussels, Paris, Berlin and other capitals are tiptoeing around the word “tax” and using phrases such as “cap on revenues” and “solidarity contribution”. In part that’s because of legislative complications back home and because at EU level, taxation requires unanimity. Poland, meanwhile, has poured cold water on the plans, saying it would take too long to redistribute those extra profits.

And in Hungary news, we’ll look at what its shortlived boycott of the Russia sanctions was all about.

Great expectations

The European Central Bank is caught between a rock and a hard place, writes Martin Arnold in Frankfurt.

As Russia throttles crucial gas supplies to Europe in response to western sanctions over its war in Ukraine, it is driving eurozone inflation up towards double-digit levels for the first time, while also threatening to drag the bloc’s economy into recession.

Here are four key things to watch from today’s ECB meeting:

1. Raising rates

   The ECB raised borrowing costs in July for the first time in more than a decade, lifting its deposit rate by 0.5 percentage points to zero, while signalling that more increases were on the way. Eurozone inflation has since then hit a new high of 9.1 per cent, while unemployment has fallen to a record low of 6.6 per cent, the euro has slipped to a 20-year-low and gross domestic product jumped by a surprisingly resilient 0.8 per cent in the second quarter.

   All this bolstered calls by the hawks — led by ECB board member Isabel Schnabel — for rates to rise by a more “forceful” 0.75 percentage points for only the second time in its history.

   But the doves, such as Greece’s central bank governor Yannis Stournaras, urge caution in the face of uncertainty. “We are in a dark room so we don’t have to take large steps,” he told the recent Alpbach conference.

2. Outlook

   The ECB will issue new quarterly forecasts today. The big question is whether it will predict a recession — two consecutive quarters of falling GDP. “I’m still convinced that the ECB is underestimating the recession risk,” said Carsten Brzeski at Dutch bank ING, predicting eurozone GDP will shrink 0.6 per cent next year.

3. Bank liquidity

   Banks have some €4.5tn of deposits placed at the ECB and policymakers are due to discuss ways of limiting the extra interest they could earn on this when its deposit rate rises above zero. The ECB gave banks €2.2tn of subsidised loans during the pandemic on which they could now earn up to €20bn of extra profit. But the early signs were that a decision could be delayed until later this year.

4. Italian risk

   As Italy prepares for an election on September 25, with Giorgia Meloni of the nationalist Brothers of Italy the favourite to be its next prime minister, nervous investors may keep pushing up the country’s borrowing costs.

   Italy’s 10-year bond yields already shot up over the summer to just below 4 per cent, near the eight-year high they hit in June. That was when the ECB announced plans for a new bond-buying scheme designed to avoid unjustified divergence in national borrowing costs, called the transmission protection instrument (TPI).

   This puts the ECB in the near-impossible situation of deciding when a country’s bond yields are justified or not, according to Germany’s former central bank chief Jens Weidmann. In a recent speech at the Hayek Foundation, Weidmann said the new scheme meant the ECB “must have an opinion on the outcome of elections and political processes, and assess likely policy decisions with a view to growth and policy finances”.

Chart du jour: Feeling the pinch

Read Alan Smith and David Sheppard’s explainer on why the average UK household electricity price is at least 30 per cent higher than in many of its European neighbours.

Viktor’s back

Hungary’s histrionics over three sanctioned Russian oligarchs evaporated yesterday under negligible pressure, but the message was clear: Viktor Orbán’s willingness to play the EU’s problem child has not eased over the summer break, writes Henry Foy in Brussels.

It made for a fun headline, but the 24-hour show of petulance was never seriously going to be allowed to block the EU rolling over sanctions on more than 1,200 Russians for another six months.

Indeed, that was never the real objective. The mini-tantrum was Budapest’s way of letting the rest of the 27 EU member states know that it is still here, still willing to wield its veto at a moment’s notice — and spoiling for a fight over the autumn’s legislative agenda if Brussels continues to withhold the cash it wants.

The EU is yet to approve Hungary’s Covid-19 recovery plan, worth €7.2bn, and Budapest is still wrangling with the European Commission over its share of bloc cohesion funds. As such, anything requiring unanimity — such as more Russia sanctions, the G7’s oil price cap or, say for example a “tax” on energy groups — is vulnerable to Orbán’s quest for leverage.

Europe Express is old enough to remember when Hungary and the Czech Republic were cosy Visegrad Four chums. Now Budapest’s obstinacy is likely to be the biggest political headache for Prague’s EU presidency.

The face-save for Budapest, hashed out with little effort but significant frustration at the ambassadors’ meeting yesterday, is a promise to discuss the individual sanctions listings in working groups. “Commitment to discuss,” underlined one official involved. “Not to act upon.”

Shorn of his erstwhile troublemaking buddies in Warsaw — for whom his admiration for Vladimir Putin and reticence in giving full-throated backing to Ukraine was a deal-breaker — Orbán nonetheless seems utterly unbowed by the prospect of going it alone despite his clear economic reliance on Brussels’ grace.

“He needs us all as well,” said one senior EU official. It will be a long autumn.

What to watch today

1. European Central Bank governing council meets in Frankfurt

2. EU finance ministers travel to Prague for an informal council tomorrow and Saturday

3. European parliament holds hearing about Greece’s use of surveillance spyware

Notable, Quotable

It wouldn’t make sense to buy Twitter if we’re heading into world war three

• Billionaire concerns: Elon Musk suggested delaying his $44bn takeover of Twitter on the grounds of Russia’s invasion of Ukraine and the risk of a global conflagration, according to texts between Musk and his banker unveiled in a US court on Tuesday.

• Sanctions malaise: Six months after many Russian oligarchs were sanctioned by the west, there is little sign that the asset freezes and travel bans have pressured them into plotting a “palace coup” against Putin, write Max Seddon in Kyiv and Polina Ivanova in London in this FT Big Read.