Eurozone inflation 8.6% in June, the ECB raises interest rates for the first time in 11 years
The ECB has announced that it will raise interest rates in July and September to offset record high inflation.
Daniel Roland | Afp | Getty pictures
Inflation in the eurozone reached a new record high in June just before the European Central Bank’s first 11-year interest rate hike.
Overall inflation came in at 8.6% (year-on-year) last month, according to preliminary figures from Europe̵[ads1]7;s statistics office Eurostat published on Friday. It beat a forecast of 8.4% in a Reuters survey among economists. The interest rate had reached 8.1% in May, which means that the cost of living continues to rise over the countries in the eurozone.
Germany surprised many earlier this week when it reported a 0.5 percentage point drop in inflation month-on-month. Experts said that this was due to new government subsidies to ease the impact of higher energy prices, and that it was not yet the end of rising inflation rates.
But both France and Spain experienced new inflation records in June, with the latter exceeding the 10% threshold for the first time since 1985, according to Reuters.
ECB action
The ECB, which has promised to tackle inflation, will meet at the end of July to announce a rise in interest rates. The central bank has said that it will rise again in September, which means that the main interest rate may return to positive territory this year – the ECB has had negative interest rates since 2014.
In her speech earlier this week, ECB President Christine Lagarde struck a hawkish tone.
“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 trip.
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 were to move rapidly in interest rate increases, this could further hamper economic growth at a time when a downturn is already underway.
We expect continued positive growth.
Christine Lagarde
ECB President
Recent business activity data suggest that the euro area is already losing momentum. The overriding question is whether the eurozone will be able to escape a recession this year, or whether it will come in 2023.
Berenberg economists predict a recession in the eurozone in 2023 with a GDP (gross domestic product) contraction of 0.8%.
However, further economic pressure from Russia’s invasion of Ukraine – particularly due to energy and food security – could tip the region to a more proactive decline sooner than expected.
So far, European officials have avoided talking about a recession.
“We still expect positive growth rates due to the domestic buffers against loss of growth momentum,” Lagarde said earlier this week. In June, the ECB forecast a GDP rate of 2.8% for the region this year. New forecasts will be published in September.
However, politicians in Frankfurt are aware that the economic downturn is a major risk they must monitor.
Philip Lane, the bank’s chief economist, said it must be vigilant in the coming months.
“With the uncertainty, we have to deal with the two 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, there may be forces that keep inflation higher than expected longer. On the other hand, we have a risk of a downturn in the economy, which will reduce inflationary pressures,” he added.
Andrew Kenningham, Europe’s chief economist at Capital Economics, said in a flash note after the data release on Friday that the figure of 8.6% “is probably not enough to bring an interest rate increase of 50 bp (instead of 25 bp) back in games for July. “
“As decision-makers are increasingly uncomfortable with their negative interest rate policy, we expect to see larger interest rate increases from September, with the deposit rate rising to +0.75% at year-end,” he said.
