The ECB announced it would raise interest rates in July and September to counter record inflation.
Daniel Roland | Afp | Getty Images
Eurozone inflation hit a new record high in June just ahead of the European Central Bank’s first rate hike in 11 years.
Headline inflation reached 8.6% (yearly) last month, according to preliminary data from the European statistics office Eurostat released on Friday. That beat the 8.4 percent forecast in a Reuters poll of economists. The rate reached 8.1% in May, meaning that the cost of living continues to rise in eurozone countries.
Germany surprised many earlier this week when it reported a 0.5 percentage point drop in inflation on a monthly basis. Experts said this was due to new government subsidies to ease the impact of higher energy prices and was not yet the end of rising inflation rates.
But both France and Spain posted new inflation records in June, with the latter surpassing the 10 percent mark for the first time since 1985, according to Reuters.
ECB action
The ECB, which has vowed to tackle the price spike, is due to meet at the end of July to announce it is raising rates. The central bank has said it will raise again in September, meaning its key interest rate could return to positive territory this year – the ECB has had negative rates since 2014.
Speaking earlier this week, ECB President Christine Lagarde struck a furious tone.
“If the outlook for inflation does not improve, we will have enough information to act more quickly,” Lagarde told an audience in Sintra, Portugal, of the period since that hike in September.
However, questions are growing about the future of monetary policy in the eurozone amid fears of a recession in the coming months. If the central bank moves to raise interest rates quickly, it could further hamper economic growth at a time when a slowdown is already underway.
We still expect positive growth.
Christine Lagarde
President of the ECB
The latest data on business activity shows that the Eurozone is already losing steam. The general question is whether the Eurozone will be able to escape recession this year, or whether it will come in 2023.
Economists at Berenberg forecast a recession in the euro area in 2023, with GDP (gross domestic product) contracting by 0.8%.
However, further economic pressure from Russia’s invasion of Ukraine — most notably in terms of energy and food security — could tip the region toward a more projected slowdown sooner than expected.
So far, European officials have avoided talking about a recession.
“We still expect positive growth rates due to domestic buffers against the loss of growth momentum,” Lagarde said earlier this week. The ECB forecast in June GDP of 2.8% for the region this year. New forecasts will be published in September.
However, policymakers in Frankfurt are aware that an economic slowdown is a major risk to watch.
Philip Lane, the bank’s chief economist, said it needed to remain vigilant in the coming months.
“With this uncertainty, we have to manage both risks,” Lane, who is also a member of the bank’s Governing Council, told CNBC’s Annette Weisbach on Tuesday at the ECB’s forum in Sintra.
“On the one hand, these could be forces that keep inflation higher than expected for a longer time. On the other hand, we have the risk of a slowdown in the economy, which would reduce inflationary pressures,” he added.
Speaking in a quick research note after the data was released on Friday, Andrew Cunningham, chief economist for Europe at Capital Economics, said the 8.6% figure was “probably not enough to bring back a 50 basis point rate hike (instead of 25 basis points) for July.”
“As policymakers become increasingly uncomfortable with their negative interest rate policy, we expect to see more rate hikes from September, with the deposit rate rising to +0.75% by the end of the year “, he said.
Add Comment