The ECB announced that it would raise rates in July and September to counter record inflation.
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Eurozone inflation hit a new high in June just ahead of the European Central Bank’s first rate hike in 11 years.
Headline inflation stood at 8.6% (year-on-year) last month, according to preliminary figures from European statistics office Eurostat released on Friday. That beat a prediction of 8.4% in a Reuters poll of economists. The rate had reached 8.1% in May, which means that the cost of living continues to rise in the countries of the euro zone.
Germany surprised many earlier this week by reporting a 0.5 percentage point drop in inflation month-on-month. Experts said this was due to new government subsidies to cushion the impact of rising energy prices and that it was not yet the end of the spike in inflation rates.
But France and Spain both recorded new inflation records in June, with the latter exceeding the 10% threshold for the first time since 1985, according to Reuters.
The ECB, which has pledged to fight against soaring prices, is due to meet at the end of July to announce its rate hike. The central bank said it would rise again in September, meaning its main interest rate could return to positive territory this year – the ECB has had negative rates since 2014.
Speaking earlier this week, the President of the ECB Christine Lagarde adopted a warmongering tone.
“If the outlook for inflation does not improve, we will have enough information to move faster,” Lagarde told an audience in Sintra, Portugal, of the period after that September hike.
However, questions about the future of monetary policy in the euro zone are increasing in a context of fears of recession in the months to come. If the central bank moves quickly to raise rates, it could further hamper economic growth at a time when a slowdown is already underway.
Recent data on business activity suggests that the Eurozone is already losing momentum. The general question is whether the eurozone will manage to escape a recession this year, or whether one will come in 2023.
Berenberg economists forecast a recession in the euro zone in 2023 with a contraction in GDP (gross domestic product) of 0.8%.
However, new economic pressures from Russia’s invasion of Ukraine – especially in energy and food security – could tip the region into a more proactive downturn sooner than expected.
So far, European officials have avoided talking about a recession.
“We still expect positive growth rates due to domestic buffers against loss of growth momentum,” Lagarde said earlier this week. The ECB forecast in June a GDP rate of 2.8% for the region this year. New forecasts will be published in September.
However, Frankfurt policymakers are aware that the economic downturn is a major risk that they need to watch out for.
Philip Lane, the bank’s chief economist, said it needed to remain vigilant over the coming months.
“With uncertainty, we have to manage both risks,” Lane, who is also a member of the bank’s board of governors, told CNBC’s Annette Weisbach on Tuesday at the ECB’s Sintra forum.
“On the one hand, these could be forces that keep inflation higher than expected for longer. On the other, we have the risk of a slowing economy, which would reduce inflationary pressure,” he said. he added.
Speaking in a flash research note after the data was released on Friday, Andrew Kenningham, chief economist for Europe at Capital Economics, said the 8.6% figure is “probably not enough to call into question set a rate hike of 50 basis points (instead of 25 basis points) for July.
“As policymakers grow increasingly uncomfortable with their negative interest rate policy, we expect larger rate hikes from September, with the deposit rate hitting +0.75 % by the end of the year,” he said.