A new surge in inflation brings larger interest rate hikes into play, despite the risk of recession


Inflation for the euro zone as a whole hit a new high in July and one of the European Central Bank’s key policymakers said it would continue to tighten.

The annualized inflation rate across the euro area was 8.9 percent in July – up from 8.6 percent in the previous month. It is the highest since monetary union came into being.

The average for the European Union as a whole was even higher in July at 9.8 percent.

The figures are the first since the ECB raised interest rates 0.5 percent more than expected in July, although it had always been expected that the impact of policy changes on near-term inflation would be slow and indirect.

Despite this, ECB Executive Board member Isabel Schnabel has hinted in an interview with Reuters that she favors another big rate hike next month, even as recession risks intensify.

Even a recession alone would not be enough to curb price pressures, said Ms Schnabel, the ECB’s head of market operations.

“In July we decided to hike rates by 50 basis points because of concerns about the inflation outlook.

“The concerns we had in July have not been allayed… I don’t think that outlook has fundamentally changed.

“I would not rule out that inflation will continue to rise in the short term,” said Ms. Schnabel, a Conservative politician.

“These inflationary pressures will probably be with us for some time; they won’t go away anytime soon. It will take some time before inflation returns to 2 percent.”

The comments point to potentially more aggressive rate hikes on the way from the ECB, although a survey by KBC Bank in Ireland found most consumers see higher interest rates putting additional strain on their finances and not helping to calm the rate hikes.

On the ground, the inflation situation varies significantly across the euro area and across the EU, ranging from 6.8 percent in France and Malta at the low end, to 23.2 percent in Estonia and 21.3 percent in Latvia.

The pace of inflation in Ireland moderated in July but stands at 9.6 percent on an annualized basis – lower than the EU average but high compared to much of the eurozone.

Typically, inflation is highest in the economies closest to Ukraine and Russia, where war and threats to energy supplies are having the greatest economic impact.

While rising prices have prompted policymakers to raise interest rates and consider further hikes, policymakers are grappling with the risk that their actions could plunge the already shaky economy into recession by weakening the supply of credit that Increase debt costs and further erode confidence.

Here, most people believe aggressively raising interest rates to fight inflation will make a bad situation worse, according to KBC Bank’s latest consumer sentiment index for August.

Existing borrowers fear their repayments will increase, while prospective homebuyers expect the rise in lending rates to make it more difficult for them to buy a home.

A quarter of people fear that higher interest rates will trigger an economic downturn and 69 percent of consumers expect their personal financial situation to be affected by higher ECB interest rates.

This sort of response complicates the ECB’s stance, especially when so much of the inflationary pressure stems from higher energy bills that tightening monetary policy will do little.

Ms Schnabel told Reuters that a recession may be on the horizon, especially if Russia cuts energy supplies.

“I wouldn’t rule out that we might end up in a technical recession, especially if energy supplies from Russia are further disrupted,” she said.

“Even if we do enter a recession, it is quite unlikely that inflationary pressures will abate on their own,” Ms Schnabel said. “The slowdown in growth will then probably not be enough to dampen inflation.”

https://www.independent.ie/business/fresh-inflation-spike-is-putting-bigger-rate-hikes-in-play-despite-risk-of-recession-41921516.html A new surge in inflation brings larger interest rate hikes into play, despite the risk of recession

Fry Electronics Team

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