FRANKFURT, Feb 3 ― Record eurozone inflation will feed a tense debate within European Central Bank over whether to raise interest rates when its policy-setting governing council meets today, with the bloc under pressure from supply disruptions and high energy prices.
Inflation unexpectedly rose to 5.1 per cent in the euro area in January, figures from Eurostat showed yesterday, the highest value since records for the currency club began in 1997.
While its counterparts in the United States and Britain are laying the ground for rate hikes in the near future, the ECB has so far expressed little interest in raising borrowing costs this year.
ECB President Christine Lagarde has repeatedly said that a tightening of monetary policy in 2022 was “very unlikely”, but the surge in inflation will embolden critics who say action should come sooner.
Any change of course was unlikely “for the time being”, said Fritzi Koehler-Geib, chief economist at the German public lender KfW.
But the pressure would increase on the ECB “in the course of the year to consider interest rate steps earlier than previously announced”.
Markets are betting that the Frankfurt-based institution will hike rates before the year is out and will be scouring Lagarde’s planned remarks at 2.30pm (1330 GMT) for any indication of a change in thinking within the ECB.
Gas peak
The ECB must tread a fine line between the “falling necessity to continue stimulating the economy and actually bringing higher inflation down”, said Carsten Brzeski, head of macro at the ING bank.
The eurozone economy reached its pre-coronavirus pandemic level in the fourth quarter of 2021, but tightening too quickly could threaten to derail the recovery.
The surge in inflation in Europe has been driven by a range of factors, but mostly on the supply side rather than the demand side, where the ECB has fewer levers to effect change.
Widespread shortages of raw materials and key components — everything from wood to semiconductors — have weighed on production and added to the upward pressure on prices.
In addition, energy prices have spiked, hitting multi-year highs towards the end of last year.
In Europe, the market has become captive to rising tensions between Moscow and the West over the massing of Russian troops on the border with Ukraine.
Any escalation in the conflict could cause prices to shoot up further.
ECB executive board member Isabel Schnabel also warned that the process of weaning Europe off fossil fuels could “lead to inflation remaining higher for longer”.
Fed ahead
While tightening monetary policy could do little to bring gas prices down or avoid a conflict in Ukraine, the ECB would be keeping a close eye on “second-round effects”, Schnabel told the German daily Sueddeutsche Zeitung in January.
Higher energy prices could mean goods and services “become more expensive and wages would start rising”, she said.
On the other side of the Atlantic, wage increases have been more visible, contributing to driving US inflation to as high as seven percent in December.
That and the comparatively lower importance of energy prices have encouraged the Federal Reserve to take tough action, accelerating towards multiple rate hikes this year.
The ECB’s more cautious response is predicated on forecasts that see inflation dropping below the central bank’s two-per cent goal in 2023 and 2024 and a promise to end stimulus bond purchases before hiking rates.
At its last meeting in December, the ECB announced a “step-by-step” reduction in its pandemic emergency bond-buying programme.
It will not update its growth and inflation projections until its next meeting in March.
Currently, the ECB’s interest rates sit at record lows, including a negative deposit rate that charges financial institutions to park their cash with the central bank overnight. ― AFP
