ECB Being Pulled in Multiple Directions as It Prepares First Rate Rise in a Decade

At the same time, she must convince investors that a major new policy tool, likely to be unveiled Thursday, can shield vulnerable Southern European economies from the risk of spiraling borrowing costs as the ECB moves to raise rates.

And she needs to convince hawkish ECB officials, and some critical member states, that those plans are robust and legally watertight.

The need to balance these three goals means the bank needs to calibrate its response to surging inflation more delicately than the Fed, possibly limiting its effectiveness. It also means the ECB could effectively be raising rates for some borrowers while pushing them down or keeping them flat for others.

The tension spilled out into the open on Tuesday when people familiar with the matter said that ECB officials would likely discuss a half-point rate increase this week—larger than the quarter-point increase that Ms. Lagarde had carefully telegraphed for weeks.

Compared with other central banks, the ECB is moving slowly to phase out easy money. While the ECB’s key rate is still set at minus 0.5%, an all-time low, the Fed is expected to raise its policy rate by 0.75 percentage point later this month to a range between 2.25% and 2.5%. Inflation has risen close to 9% on both sides of the Atlantic, and shows few signs of retreating in either region. Canada’s central bank last week increased its target interest rate by a full percentage point, to 2.5%, the highest level since 2008.

The ECB’s caution helped to drive the common currency to a 20-year low against the dollar in recent days, which raises the cost of Europe’s imports and makes it even harder for the ECB to stifle inflation.

“In hindsight, the very gradual and cautious normalization process the ECB started at the end of last year has simply been too slow and too late,” said

Carsten Brzeski,

an…