Inflation in the eurozone reached a new high in June, just before of the European Central Bank’s first rate hike in 11 years.
According to preliminary estimates released Friday by Europe’s statistics body Eurostat, headline inflation was 8.6 per cent year on year last month. A Reuters survey of economists predicted 8.4 pe rcent growth. The rate had reached 8.1 per cent in May, indicating that the cost of living in the eurozone countries is continuing to rise.
Germany startled many earlier this week when it reported a 0.5 percentage point decline in monthly inflation. According to experts, this was due to new government subsidies designed to mitigate the impact of increasing energy prices, and it was not the end of the surge in inflation rates.
However, both France and Spain set new inflation records in June, with the latter exceeding the 10 per cent mark for the first time since 1985, according to Reuters.
The ECB, which has promised to address the price rise, is scheduled to convene in late July to announce interest rate increases. The central bank has stated that it will raise interest rates again in September, implying that the main interest rate may return to positive territory this year — the ECB has maintained negative rates since 2014.
ECB President Christine Lagarde took a hawkish tone earlier this week.
“If the inflation outlook does not improve, we will have sufficient information to move faster,” Lagarde told an audience in Sintra, Portugal, about the period after that September hike.
However, given worries of a recession in the coming months, there are mounting concerns about the future of monetary policy in the eurozone. If the central bank raises interest rates too soon, economic development would be hampered even further at a time when it is already slowing.
Recent data on economic activity suggests that the eurozone is already losing pace. The overarching question is whether the eurozone will avoid a recession this year or wait until 2023.
Berenberg economists predict a eurozone recession in 2023, with a 0.8 per cent drop in GDP (gross domestic product).
However, further economic pressures from Russia’s invasion of Ukraine, particularly over energy and food security, may cause the area to enter a more protracted recession sooner than planned.
So far, European policymakers have avoided discussing the possibility of a recession.
“We are still expecting positive growth rates due to the domestic buffers against the loss of growth momentum,” Lagarde said earlier this week. The ECB forecast in June a GDP rate of 2.8 per cent for the region this year. New forecasts will be published in September.
However, policymakers in Frankfurt recognise that the economic slowdown is a significant danger that must be monitored. The bank’s top economist, Philip Lane, stated that it must be attentive in the coming months.
“With the uncertainty, we have to manage the two risks,” Lane, who is also a member of the bank’s Governing Council, said at the ECB’s Sintra Forum.
“On the one side, that could be forces that keep inflation higher than expected for longer. On the other side, we do have the risk of a slowdown in the economy, which would reduce inflationary pressure,” he added.
Andrew Kenningham, Capital Economics’ senior Europe economist, said in a flash research note released Friday that the 8.6 percent figure is “probably not enough to bring a 50bp rate hike (rather than 25bp) back into play for July.”
“As policymakers are increasingly uncomfortable with their negative-interest rate policy we expect to see bigger rate hikes from September, with the deposit rate rising to +0.75% by year-end,” he said.
(Adapted from Bloomberg.com)