– by Reinhard Becker and Frank Siebelt
Berlin/Frankfurt (Reuters) – Inflation in the euro zone has risen to a new record high as a result of the Ukraine war and is ringing alarm bells at the Bundesbank.
Services and goods cost an average of 7.5 percent more in March than a year earlier, according to the statistics office Eurostat on Friday. Experts polled by Reuters had only expected 6.6 percent after 5.9 percent in February. Inflation is now well above the European Central Bank’s (ECB) target of 2.0 percent and is causing the currency holders, who continue to steer towards low interest rates, into explanations. Bundesbank boss Joachim Nagel was surprised by the force of the price hike: “The inflation data speak a clear language. Monetary policy must not miss the opportunity to take countermeasures in good time.”
Commerzbank chief economist Jrg Krmer also sees a need for action: “Now it’s important that the ECB finally takes its foot off the gas. Otherwise, inflation expectations will continue to rise and high inflation will become permanent,” warned Commerzbank chief economist Jrg Krmer.
The main drivers are the sharp rise in energy prices, which continued to rise as a result of the Ukraine war. They increased by 44.7 percent over the year after 32.0 percent in February. Unprocessed foods rose 7.8 percent. In the short term, the ECB is preparing for further increases in consumer prices in the euro area. ECB Vice President Luis de Guindos does not expect the wave of inflation to peak for a few months. It should then flatten out in the second half of the year.
CALLS FOR A RATE RISE
At the same time, after the Ukraine shock, the economy is likely to falter for the time being if the Spaniard is right with his forecast. Accordingly, only slight growth is to be expected for the first quarter and a value close to zero for the second quarter. The ECB intends to end its multi-billion dollar bond purchases in the third quarter if the inflation outlook allows. The end of the bond program is considered a precursor to an interest rate hike that is to be implemented “some time” after the end of the bond purchases. Some monetary authorities are urging the turnaround to be swift. The head of the Austrian central bank, Robert Holzmann, already mentioned September as the date for a turnaround in interest rates.
His mantra: if inflation rises, it’s the job of the central bank to raise interest rates. In 2014, the ECB lowered the deposit rate to below zero percent for the first time. It is currently at minus 0.5 percent. Holzmann is pushing for an abolition of these penalty interest rates for banks that park money at the ECB. Even the head of the Dutch central bank, Klaas Knot, had not ruled out two interest rate hikes in the current year.
“The war in Ukraine and the return of the corona pandemic in China will keep the pressure on prices high, and inflation will become a permanent feature,” predicts chief economist Alexander Krger from the private bank Hauck Aufhuser Lampe. In the current situation, the ECB has no choice but to tackle monetary tightening, said KfW chief economist Fritzi Khler-Geib. Referring to the policy of flexibility by the currency holders, she added: “This could also result in interest rates being raised a little faster than previously planned.”