ECB under pressure to tame soaring prices
First interest rate increase in more than two decades likely as eurozone suffers record levels of inflation
EUROZONE producer prices have soared at the fastest pace in more than two decades, piling pressure on Christine Lagarde and the European Central Bank to tame inflation by raising interest rates.
Prices across the bloc rose 37.2pc in the year to April, up from March’s alltime high of 36.9pc and the highest rate since the formation of the euro in 1999, official figures revealed.
It comes as European Central Bank (ECB) policymakers prepare to meet in Amsterdam next week with the first interest rate rise in more than a decade widely expected.
Analysts highlighted that a rise in the price of wholesale consumer goods, including food and drink, meant inflationary pressures were being felt well beyond energy costs as the fallout broadens from Russia’s invasion of Ukraine
Factory prices for food and drink increased by 11.2pc, the category’s first ever double-digit rise. Durable goods such as cars and furniture were 8.5pc higher and despite a recent fall in wholesale gas prices, energy costs have doubled over the past 12 months.
François Villeroy de Galhau, France’s central bank governor and a member of the ECB governing council, underlined in a speech yesterday that core inflation is nearly double the bank’s target of 2pc.
He said: “Inflation is not only too high, but also too broad. This requires a normalisation of monetary policy.”
Oliver Rakau, chief German economist at Oxford Economics, told the Financial Times: “If you look at inflation rates it has been broadening beyond energy for quite a while.
“There is always a chain of events and there’s no denying that higher energy and commodity prices will feed through to other products, like food and drink, and could lead to higher restaurant prices, pushing up services inflation.”
With eurozone consumer prices rising at 8.1pc, and core inflation at 3.8pc, the ECB is expected to raise interest rates by as much as a half percentage point in July.
Ms Lagarde, president of the ECB, recently suggested that quarter-point rises in July and September were likely.
She wrote at the end of last month: “Since December last year, the ECB has been starting the journey down the path of policy normalisation.
“The conditions facing monetary policy have changed markedly.
“[An] unprecedented combination of shocks has been reflected in broader and more prolonged inflation pressures.
“The Russia-ukraine war may well prove to be a tipping point for hyperglobalisation, causing geopolitics to become more important for the structure of global supply chains. That could lead to supply chains becoming less efficient for a while and, during the transition, create more persistent cost pressures for the economy.
“Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”
Analysts from ING said: “The ECB has clearly passed the stage of discussing whether and even when policy rates should be increased. The only discussion seems to be on whether the ECB should start with a 25 [basis point] rate hike in July, or move faster with a 50 [basis point] hike.
“If both headline and core inflation increase further in the coming weeks, a 50 [basis point] rate hike in July will still be on the table.”