The ECB has announced that it will hike interest rates in July and September to counter record inflation.
DanielRoland | AFP | Getty Images
Inflation in the euro zone hit a new record high in June just before the European Central Bank raised interest rates for the first time in 11 years.
Headline inflation was 8.6% (yoy) last month, according to preliminary figures from Europe’s statistics office Eurostat, released on Friday. That beat a forecast of 8.4% in a Reuters poll of economists. The rate had hit 8.1% in May, meaning the cost of living in euro zone countries continues to rise.
Germany surprised many earlier this week when it reported a 0.5 percentage point month-on-month fall in inflation. Experts said this was due to new government subsidies to mitigate the impact of higher energy prices and it is not the end of rising inflation rates.
But both France and Spain experienced new inflation records in June, with the latter breaking the 10% mark for the first time since 1985, according to Reuters.
ECB action
The ECB, which has promised to act against the price hike, will meet at the end of July to announce its rate hikes. The central bank has announced that it will hike again in September, meaning its main interest rate could return to positive territory this year – the ECB has had negative interest rates since 2014.
Earlier this week, ECB President Christine Lagarde struck an aggressive tone.
“If the inflation outlook doesn’t improve, we will have enough information to move faster,” Lagarde told an audience in Sintra, Portugal, of the post-September hike.
However, fears of a recession in the coming months are raising questions about the future of monetary policy in the eurozone. If the central bank were to hike rates quickly, it could further hamper economic growth at a time when a slowdown is already underway.
We continue to expect a positive development.
Christine Lagarde
ECB President
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 if it comes in 2023.
Berenberg economists are forecasting a recession in the euro zone for 2023 with a 0.8% decline in GDP (gross domestic product).
However, further economic pressures from Russia’s invasion of Ukraine – particularly around energy and food security – could push the region into a more proactive slowdown sooner than expected.
So far, European officials have avoided speaking of 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 in June forecast a GDP rate of 2.8% for the region this year. New forecasts will be published in September.
However, policymakers in Frankfurt are aware that the economic slowdown is a major risk that they need to keep an eye on.
Philip Lane, the bank’s chief economist, said it must remain vigilant in the coming months.
“With the uncertainty, we have to manage the two risks,” Lane, who is also a member of the Governing Council, 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 for longer than expected. On the other hand, there is a risk of the economy slowing down, which would ease inflationary pressures,” he added.
In a flash research note following Friday’s data release, Andrew Kenningham, chief European economist at Capital Economics, said the 8.6% figure was “probably not enough to warrant a 50 basis point rate hike (instead of 25 basis points) back into July to bring game.”
“As policymakers become increasingly dissatisfied with their negative interest rate policies, we expect larger rate hikes from September, with the deposit rate rising to +0.75% by the end of the year,” he said.