– by Frank Siebelt and Reinhard Becker
FRANKFURT (Reuters) – After months of declining inflationary pressures, inflation in the euro area picked up again slightly in April.
In view of persistent inflation in the 20-nation community, the pressure on the European Central Bank (ECB) remains high to maintain its rate hike course. In April, consumer prices rose by 7.0 percent year-on-year, according to an initial estimate from the statistics office Eurostat on Tuesday. Analysts had expected that. Inflation is therefore still more than three times as high as the target of two percent, which the ECB considers to be the optimal value. Inflation fell to 6.9 percent in March, after 8.5 percent in February. The next interest rate meeting of the ECB will take place this Thursday.
According to economists, there can be no talk of the all-clear. “It will be months before the ECB’s price target becomes visible on the horizon,” says chief economist Alexander Krüger from Hauck Aufhäuser Lampe Privatbank. “With core inflation remaining crushing, interest rate hikes remain the order of the day.” The core rate, which excludes volatile energy and food prices as well as alcohol and tobacco, edged down to 5.6 percent in April from 5.7 percent in March. “If there are still arguments for further significant interest rate hikes by the ECB, they will be delivered with the April inflation data at the latest,” says Thomas Gitzel, chief economist at VP Bank. The renewed increase in inflation shows that inflationary pressure remains high.
Chief economist Fritzi Köhler-Geib from the state development bank KfW considers a change to smaller interest rate steps to be the most likely, despite a fairly stubborn core inflation. “Because in view of the rapidly falling sales price expectations and the material bottlenecks that have now largely been resolved, a decreasing price pressure from the goods component in the shopping basket is foreseeable,” she said. Most economists recently expected a rate hike of 0.25 percentage points on Thursday. The deposit rate, which is decisive on the financial markets and which financial institutions receive for parking excess funds, would thus rise to 3.25 percent.
The most recent quarterly survey by the central bank on bank lending – the so-called Bank Lending Survey (BLS) – also speaks in favor of a small interest rate hike by the ECB. According to this, demand for loans from companies fell significantly in the first quarter. For the second quarter, banks are expecting a further, albeit not quite as severe, weakening of credit demand. According to the survey, the institutes also significantly tightened their standards for corporate loans in the first quarter. “All of this should be welcome news for the central bankers insofar as the tightening of their monetary policy is having an effect,” commented Commerzbank economist Marco Wagner. This provides monetary authorities, who prefer loose monetary policy, with arguments for a slowdown in the pace of interest rate hikes on Thursday.
SLIGHT INCREASE IN ENERGY PRICES
Energy prices rose by 2.5 percent year-on-year in April. As recently as March, they were down 0.9 percent due to a base effect as energy prices soared after Russia’s invasion of Ukraine a year ago. Food, alcohol and tobacco prices rose 13.6 percent in April, after jumping 15.5 percent in March. Non-energy industrial goods rose 6.2 percent in April. In March, the increase was 6.6 percent. Services prices rose 5.2 percent in April, after a 5.1 percent gain in March.
In the fight against high inflation, the ECB has already raised its key rates six times in a row at a rapid pace since July 2022 – most recently by 0.50 percentage points in mid-March. In view of the turbulence in the banking industry, ECB President Christine Lagarde had announced that the monetary watchdogs wanted to take a cautious approach for the time being. However, some euro watchdogs had recently campaigned for interest rates to continue to rise. Among other things, she is concerned that high inflation rates will become part of people’s expectations. This would make it even more difficult for euro watchdogs to push inflation back towards two percent.
(Edited by Hans Seidenstücker; If you have any questions, please contact our editorial team at [email protected] (for politics and economics) or [email protected] (for companies and markets).)