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ECB To Mark A Year Of Increases With Inflation Remaining Elevated

As their fight against inflation in the eurozone enters its second year and consumer prices continue to rise rapidly, it appeared likely that the European Central Bank would raise interest rates again on Thursday.

In an effort to combat skyrocketing prices, the ECB initiated the most aggressive rate-hiking cycle in the institution’s history in July of last year.

Since then, key interest rates have increased by four percentage points, and “virtually everyone” anticipates another quarter-point increase at Thursday’s meeting, German central bank chief Joachim Nagel stated last week.

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It would be the ninth consecutive increase by the ECB, bringing the closely monitored deposit rate to 3.75 percent, its highest level since 2000.

However, the outlook for the ECB beyond Thursday’s meeting was less certain, as the eurozone economy appears to have lost momentum.

The 20 members of the currency bloc collectively entered a recession at the turn of the year, with their economies contracting for two consecutive quarters.

However, consumer prices have continued to rise rapidly. In June, the inflation rate in the eurozone was 5.5%, down from last year’s double-digit apex but still well above the ECB’s 2% target.

Anniversary celebration

The European Central Bank (ECB) ended years of ultra-loose monetary policy in July 2014 when it raised interest rates by a half point in response to a spike in energy and food prices caused by Russia’s conflict in Ukraine.

According to Eric Dor, director of the IESEG business school, the recent moderation in headline inflation was “primarily due to a slowdown in the annual growth of energy prices.”

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However, as Dor noted, “excluding energy, the reduction in annual price growth is still quite modest.”

In the eurozone, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose to 5.4% in June from 5.3% in May.

At the end of June, ECB president Christine Lagarde stated that inflation was “working its way through the economy in phases.”

Officials at the central bank headquartered in Frankfurt are now more concerned about the impact of increasing wages as workers demand higher pay to cover rising costs.

Lagarde stated that it was “unlikely” that the ECB would soon be able to determine whether interest rates had peaked.

Analysts will pay close attention to Lagarde’s press conference at 2:45 p.m. (12:45 GMT) for a signal as to whether the institution will continue to raise interest rates at its next meeting.

Despite the already dismal economic forecast, policymakers will “insist on a data-driven, wait-and-see approach,” according to Salomon Fiedler, economist at Berenberg Bank.

“Countdown to Doomsday”

However, according to Carsten Brzeski, director of macro at ING Bank, “the countdown to the end of rate increases has begun.”

The European Central Bank (ECB) could raise interest rates for the last time in September, but concerns about a “cooling economy and fading inflationary pressure” could then catch up with the central bank, he added.

The ECB’s governing council has already expressed skepticism regarding the future path of interest rate hikes.

The chief of the Dutch central bank, Klaas Knot, stated earlier this month that additional rate hikes beyond July would be “possible but by no means assured.

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Political leaders in the south of the eurozone, where debt levels are higher, have also reacted angrily to the sharp increases in interest rates.

Prior to the meeting, Portuguese Finance Minister Fernando Medina stated that additional increases “could make the growth situation in Europe more difficult.”

Giorgia Meloni, the far-right Italian prime minister, similarly criticized the ECB’s “simplistic recipe of raising interest rates” and warned that “the cure risks proving more harmful than the disease.”

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