- The latest figures come just days before the ECB is due to announce a new monetary policy decision.
- The central bank embarked on its current hiking path in July 2022, when it brought the key rate from -0.5% to zero. The ECB’s main interest rate is currently 3%.
Detail of a fish and seafood stall at the central market in Valencia, Spain.
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The headline inflation rate in the eurozone rose in April, according to preliminary data released on Tuesday, and remained well above the levels targeted by the European Central Bank, but core price inflation showed a surprising slowdown.
Headline inflation came in at 7% for last month, according to Eurostat, after falling to 6.9% in March. At the same time, core inflation, which excludes food and energy prices, was 5.6% in April – from 5.7% in March. Analysts polled by Reuters had estimated a figure of 7% for overall inflation and 5.7% for core.
The latest figures come just days before the ECB is due to announce a new monetary policy decision on Thursday. Instead of providing any clarity on how much the central bank can raise interest rates by, the latest figures have made the picture somewhat blurred.
Market participants have discussed whether the central bank will increase Thursday by 50 or 25 basis points. On the one hand, the increase in headline inflation could push hawkish members of the ECB to argue for a new increase of 0.5 percentage points. On the other hand, the unexpected slowdown in core price inflation could tip the balance towards a more dovish stance and result in a compromise rate hike of 25 basis points.
“The small decline in core HICP inflation in April leaves it near a record high and will not resolve the 25bp to 50bp debate for the ECB this week,” Andrew Kenningham, chief economist for Europe at Capital Economics, said in a note. .
However, Carsten Brzeski, global head of macro at ING, said that “sticky inflation data clearly underlines the need to continue the hike, but with last week’s weaker-than-expected GDP growth report and today’s weak loan growth and loan demand data, there is reason to slow down the pace and size on interest rate increases has become stronger.”
The economy in the eurozone grew by 0.1% in the first quarter of the year, according to preliminary figures on Friday. This was below market expectations.
The central bank embarked on its current hiking path in July 2022, when it brought the key rate from -0.5% to zero. The ECB’s main interest rate is currently 3%.
Despite the steady interest rate increases, inflation remains above the ECB’s target of 2%. Estimates published last week by the International Monetary Fund suggested that headline inflation will not come close to the ECB’s target until 2025.
“Further tightening is necessary, and once the terminal rate is reached, that terminal rate needs to be maintained longer, because core inflation is … high, and it is very persistent. And there is nothing worse than pausing an anti-inflation effort too early, or to leave it too early because if you need to do it again, the cost to the economy is so much greater, Alfred Kammer, director of the European Department of the IMF, told CNBC on Friday.