The European Central Bank announced that it will raise interest rates in July and September to counter record inflation.
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Eurozone inflation hits new record in June ahead of June European Central BankFirst rate increase in 11 years.
Headline inflation came in at 8.6% (y/y) for the past month, according to preliminary figures released by Eurostat on Friday. That beat expectations of 8.4% in a Reuters poll of economists. The rate was 8.1% in May, which means that the cost of living continues to rise in the 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 that this is due to the new government support to mitigate the impact of high energy prices, and this was not an end to the high inflation rates.
But both France and Spain saw new inflation records in June, with the latter crossing the 10% threshold for the first time since 1985, according to Reuters.
The work of the European Central Bank
The European Central Bank, which has vowed to tackle price hikes, is due to meet in late July to announce its rate hike. The central bank said it will raise again in September, which means the key rate could return to positive territory this year – the European Central Bank has had negative rates since 2014.
Speaking earlier this week, the President of the European Central Bank Christine Lagarde tough tone.
“If inflation expectations do not improve, we will have enough information to move faster,” Lagarde told an audience in Sintra, Portugal, of the period after the September rally.
However, there are growing questions about the future of monetary policy in the Eurozone amid fears of a recession in the coming months. If the central bank moves quickly in raising interest rates, it could further hamper economic growth at a time when the slowdown has already begun.
We continue to expect positive growth.
Christine Lagarde
President of the European Central Bank
Recent business data indicates that the Eurozone is already losing steam. The general question is whether the eurozone will manage to escape recession this year, or whether it will happen in 2023.
Berenberg economists forecast a recession in the eurozone in 2023 with GDP (gross domestic product) shrinking by 0.8%.
However, more economic pressure from Russian invasion of Ukraine – particularly on energy and food security – could push the region into a more proactive slowdown earlier than expected.
So far, European officials have avoided talking about a recession.
“We continue to expect positive growth rates due to domestic reserves against a loss of growth momentum,” Lagarde said earlier this week. The European Central Bank forecast in June a GDP rate of 2.8% for the region this year. New forecasts will be published in September.
However, policymakers in Frankfurt understand that the economic slowdown is a major risk that they need to watch.
Philip Lane, the bank’s chief economist, said it needs to remain vigil over the coming months.
“With uncertainty, we have to manage both risks,” Lane, who is also a member of the bank’s board of directors, told CNBC’s Annette Weisbach on Tuesday at the ECB’s Sintra Forum.
“On the one hand, these may be forces that keep inflation higher than expected for a longer period. On the other hand, we have the risk of a slowdown in the economy, which would reduce inflationary pressure,” he added.
Speaking in a quick research note after the data was released on Friday, Andrew Kenningham, chief European economist at Capital Economics, said the 8.6% figure “may not be enough to bring the rate hike back by 50 basis points (instead of 25 basis points) into effect in July.” …”
“As policy makers are increasingly uncomfortable with negative interest rate policy, we expect to see a further hike in rates from September, with the deposit rate rising to +0.75% by the end of the year,” he said.
