Eurozone consumer prices rose a record 7.5 percent year-on-year in March, putting pressure on the European Central Bank to tighten its ultra-loose monetary policy faster than planned.
The biggest factors pushing up euro-zone inflation were higher energy and food prices, which have risen sharply since Russia’s invasion of Ukraine impacted supplies of oil, gas and other commodities.
The flash estimate for March’s rise in the harmonized index of consumer prices from a previous record of 5.9 percent in February came well above the average forecast of 6.6 percent by economists polled by Reuters.
The rise in euro-zone consumer prices, well above the ECB’s 2 percent target, has prompted some of its policymakers to urge the central bank to curb demand by unveiling its plan to end net asset purchases and interest rates for the first time to raise more than a decade.
Investors are pricing in a 0.63 percentage point rate hike by the ECB before the end of this year, which would bring its main deposit rate back into positive territory for the first time since 2014, up from its current all-time low of minus 0.5 per cent.
However, some ECB policymakers fear the war in Ukraine could plunge Europe into recession this year, while sharp rises in the cost of living could undermine any recovery in consumer demand sparked by the lifting of coronavirus restrictions.
“You’re being torn in two directions at the ECB,” said Spyros Andreopoulos, senior European economist at BNP Paribas and a former ECB staffer.
“The intention was to get off the emergency policy stance and get out of negative interest rates this year – and I think most people at the ECB would have been okay with that,” Andreopoulos said. “But now they fear the war could have a big impact on growth in the near term, delaying the start to December.”
Several ECB policymakers have said they expect the central bank to hike rates this year and some, like Klaas Knot of the Netherlands, have said they could do so twice this year.
But the central bank has so far only announced plans to halt net bond purchases until September, when it will decide whether inflation remains strong enough to justify a rate hike. This contrasts with the US Federal Reserve and Bank of England, both of which have already begun a series of rate hikes this year in response to rising inflation.
“We have opposing forces,” Philip Lane, the ECB’s chief economist, told CNBC on Friday. “We have the energy shock and the prospect of second-round effects driving up inflation, [while] on the other hand . . . the weakening of mood [and] that real incomes will suffer from high energy prices.”
Jack Allen-Reynolds, senior economist at Capital Economics, predicted that the ECB would hike rates three times this year by a total of 0.75 percentage points, saying: “The ECB will soon decide it can’t wait any longer before they start raising interest rates.”
In March, energy prices across the euro area rose by an all-time high of 44.7 percent year-on-year, while unprocessed food prices rose 7.8 percent, Eurostat said on Friday.
Even excluding the more volatile energy, food, alcohol and tobacco prices, core inflation rose to 3% in March from 2.7% in February – underscoring that price pressures are becoming broader.
The rise in inflationary pressures was underscored by a 2.5 percent rise in euro-zone consumer prices between February and March, a record month-on-month increase.
Inflation is expected to continue to rise as the war in Ukraine fuels turmoil in energy markets and, coupled with China’s ‘zero Covid’ lockdowns on key industrial areas, exacerbates supply chain issues that are leaving companies with material shortages.
Manufacturers in the euro zone reported the largest price hikes for products leaving their factories since such data was collected in the 1990s, according to the latest purchasing manager survey released by S&P Global on Friday.