Surging eurozone inflation threatens split over interest rate rises

INFLATION in the eurozone leapt to a record high in May in another sharper than feared price surge that threatens to open a rift over how swiftly the bloc’s central bank increases interest rates.

Rocketing energy and grocery bills drove prices 8.1pc higher in the 12 months to May, up from 7.4pc the previous month, according to Eurostat.

Economists said the case for the ECB pulling interest rates out of negative territory is now “irrefutable” after energy prices soared 39pc and high core inflation pointed to cost pressures spreading. Core inflation – which excludes energy and food prices – unexpectedly jumped to 3.8pc while grocery bills rocketed 7.5pc year on year.

The figures will stoke tensions in the bloc over how quickly the ECB should tighten monetary policy as more hawkish policymakers in the north, including Germany, demand swift action.

ECB policymaker Ignazio Visco warned yesterday that rate hikes must be gradual given the economic uncertainty while French rate-setter François Villeroy de Galhau said the inflation figures in France justified “a progressive but resolute monetary policy normalisation”.

Of the “big four” eurozone economies, Germany suffered the highest inflation rate at 8.7pc while France’s was the lowest at 5.8pc.

Markets expect the ECB to begin increasing borrowing costs in July but economists said next week’s meeting could now be “live” as prices surge.

The ECB pushed interest rates deeper into negative territory during the pandemic but borrowing costs are expected to rise in the coming months.

Claus Vistesen at Pantheon Macroeconomics said the “hawks are licking their chops”, arguing an interest rate rise could come as soon as next week. Andrew Kenningham at Capital Economics predicted the ECB’S deposit rate will rise to 0.75pc by the end of the year.

It came as recession fears in France mounted after data revisions meant that its economy contracted 0.2pc in the first three months of the year.

Official figures initially said that GDP flatlined in the first quarter and ING warned the French economy is now likely to be “currently in recession”.