Daniel Roland | Afp | Getty Images Eurozone inflation hit a new record high in June, shortly before the European Central Bank raised interest rates for 11 years. Core inflation reached 8.6% (year-on-year) last month, according to preliminary data from Eurostat released on Friday. This exceeded the forecast of 8.4% in a Reuters poll with economists. The rate had reached 8.1% in May, which means that the cost of living continues to rise in all eurozone countries. Germany surprised many earlier this week when it reported a drop in 0.5 percentage points of inflation on a monthly basis. Experts say this is due to new government subsidies to mitigate the impact of higher energy prices and that it was not yet the end of rising inflation. However, both France and Spain set new inflation records in June, exceeding the 10% mark for the first time since 1985, according to Reuters.
ECB action
The ECB, which has pledged to deal with rising prices, is due to meet in late July to announce interest rate hikes. The central bank said it would raise it again in September, which means its key interest rate could return to positive territory this year – the ECB has had negative interest rates since 2014. Speaking earlier this week, ECB President Christine Lagarde gave an aggressive tone. “If the outlook for inflation does not improve, we will have enough information to move faster,” Lagarde told an audience in Sintra, Portugal, about the post-September period. However, there are growing questions about the future of monetary policy in the euro area amid fears of a recession in the coming months. If the central bank moves fast on rising interest rates, this could further hamper economic growth at a time when the slowdown is already under way. We are still waiting for positive growth. Christine Lagarde President of the ECB Recent business data suggest that the euro area is already losing momentum. The general question is whether the eurozone will be able to escape the recession this year or whether it will come in 2023. Berenberg economists predict a recession in the eurozone in 2023 with a contraction in GDP (gross domestic product) of 0.8%. However, further economic pressures from Russia’s invasion of Ukraine – mainly on energy and food security – could lead the region to a more cautious slower pace than expected. So far, European officials have refrained from talking about a recession. “We are still expecting positive growth due to domestic stockpiles against the loss of dynamic growth,” Lagarde said earlier this week. The ECB forecast 2.8% of GDP for the region in June this year. New forecasts will be published in September. However, policymakers in Frankfurt know that the economic slowdown is a major risk to watch out for. Philip Lane, the bank’s chief economist, said he needed to stay alert in the coming months. “With uncertainty, we have to manage the two risks,” Lane, who is also a member of the bank’s board, told CNBC’s Annette Weisbach at the ECB’s Sintra Forum on Tuesday. “On the one hand, these could be forces that keep inflation higher than expected for a longer period of time. On the other hand, we have the risk of a slowdown in the economy, which will reduce inflationary pressures,” he added. Speaking in a flash research note after the data was released on Friday, Andrew Kenningham, chief economist for Europe at Capital Economics, said the 8.6% rate “is probably not enough to restore a 50 basis point increase in interest rates (instead of 25 basis points) for July. “ “As policymakers feel increasingly uncomfortable with negative interest rate policy, we expect to see higher interest rate increases from September, with the deposit rate rising to + 0.75% by the end of the year,” he said.
