Price growth in the eurozone hit a record high of 8.6 percent in the year to June, intensifying tensions between rate-setters at the European Central Bank over the speed of its planned interest rate rises.
Eurozone inflation increased from 8.1 percent in May, after a sharp acceleration of energy and food prices in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc more than offset a slowdown in German inflation driven by transport and electricity subsidies to cushion the higher cost of living.
Economists polled by Reuters had expected eurozone inflation of 8.4 percent. Claus Vistesen, an economist at Pantheon Macroeconomics, said the bigger than expected rise “increases the risk” that the ECB will raise rates by more than its planned quarter percentage point at its meeting in three weeks, adding the central bank was “miles behind the curve”.
ECB president Christine Lagarde said at the bank’s annual forum in Sintra, Portugal, this week that it would stick to its plan to begin raising interest rates with an increase of 25 basis points on July 21. She said a bigger move was likely in September unless there is a swift slowdown in inflation.
The central bank is juggling a difficult balancing act between reversing almost a decade of ultra-loose money to rein in rampant price growth while trying to avoid dragging the region into a deep recession or another debt crisis after borrowing costs rose sharply in weaker countries such as Italy.
Fabio Panetta, the most dovish member of the ECB executive board, said in a speech on Friday that rate rises should be “gradual” because, unlike the US, high inflation “does not reflect excess demand in the euro area”.
“Consumption and investment remain below their pre-pandemic level and even further away from their pre-pandemic trend,” Panetta said. Once the ECB’s deposit rate rises from minus 0.5 percent back above zero, any further moves “will depend on the evolution of the outlook for inflation and the economy”, he added.
However, some hawkish rate-setters on the ECB’s governing council including several in the Baltics where inflation is highest — plan to push for a larger rate rise of 50bp in July because of their concerns that price pressures show few signs of easing.