PARIS – Inflation in the euro zone quickened to the highest level in almost three years, cementing the case for an interest rate hike by the European Central Bank (ECB) next week.
Consumer prices rose 3.3 per cent from a year ago in August, up from 2.9 per cent the previous month, Eurostat said on Sept 1. That was the highest since September 2023 and in line with the median estimate in a Bloomberg survey.
A core gauge, excluding volatile items like food and energy, unexpectedly edged down to 2.4. per cent, however, while the closely watched services gauge fell to 3 per cent.
With the Iran war keeping inflation well above the 2 per cent goal and the euro-zone economy proving surprisingly robust, investors are betting the ECB is about to add to June’s initial increase in borrowing costs.
Another quarter-point hike on Sept 10 is now fully priced by markets, which reckon more will follow.
“The sharp rise in headline inflation contrasts with a drop in underlying measures of price increases,” said David Powell, senior euro-area economist. “That divergence supports our view that the ECB is unlikely to tighten by as much as financial markets are currently pricing in.”
“A cooling labour market should limit the pass-through of higher commodity prices into goods and services inflation more broadly, although a more persistent energy shock could still put another hike – potentially in December – on the table,” he added.
Executive Board member Isabel Schnabel told Bloomberg last week that borrowing costs must rise further to bring price gains back to target. Other policymakers have expressed similar thoughts.
“Upside risks to inflation have increased again recently,” Austrian central bank chief Martin Kocher said on Sept 1. “If this picture is confirmed in the ECB’s new forecast, I believe another interest-rate hike will be necessary in the near future.”
Elevated oil and gas prices are feeding inflation pressure across the 21-nation euro area.
Separate data on Sept 1 showed a sharp increase in Italy to 3.2 per cent from 2.9 per cent, while figures published last week revealed a jump in Spain’s reading to 4.5 per cent. The bloc’s top two economies, Germany and France, both recorded accelerations in August.
A hike next week would lock in the ECB’s status as the most hawkish central bank within the Group of Seven. Others may be preparing to follow suit, however.
Despite not signalling explicit support for a move, Federal Reserve Chair Kevin Warsh said last week that curbing inflation is the top priority.
In the meantime, monetary tightening is coming from bond markets.
Global yields climbed back to the highest level in almost two decades on Sept 1, as rising oil prices fuel inflation concerns and wagers on Fed action are ramped up.
A key question for the ECB is whether its deposit rate, currently 2.25 per cent, will need to be lifted to levels where borrowing costs restrain activity. Chief economist Philip Lane has indicated that 2.5 per cent is the upper limit of the so-called neutral range.
Officials debated in July whether “mildly restrictive” policy may be needed to get prices back to target, with some indicating recently that rates could rise beyond 2.5 per cent.
Others, like Executive Board member Piero Cipollone, urge caution with second-round inflation effects from the war not visible yet and economic damage a risk. BLOOMBERG
