The European Central Bank is set to raise interest rates despite low inflation in the Eurozone

[ad_1]

Eurozone interest rate setters are set to raise borrowing costs by another half a percentage point on Thursday, after figures published today showed that underlying inflationary pressures in the region remain uncomfortably high.

The regional rate of core inflation – which excludes changes in food and energy prices and is considered the best measure of stability in price pressures – remained unchanged at an all-time high of 5.2 percent in the year to January.

That figure, along with the resilience of eurozone output during the fourth quarter of 2022, all but confirms that the European Central Bank will raise the deposit rate by another half percentage point to 2.5 percent around lunchtime on Thursday.

The bank raised interest rates by 2.5 percentage points during the second half of 2022 in response to inflation, which hit a record 10.6 percent in October. The main rate fell from 9.2 per cent in the year to December to 8.5 per cent last month – still more than four times the European Central Bank’s target of 2 per cent.

Anna Titareva, an economist at Swiss bank UBS, said the ECB would want to see an improvement in the “broader inflation environment” before changing the course of its monetary policy.

The jump in core inflation in some major countries [such as Spain] It would be enough for the central bank to confirm its current hawkish stance, said Bert Cullen, economist at ING Bank.

Ken Watertt, head of European analysis at S&P Global Market Intelligence, a data firm, said rate-setters remained “on track” to raise interest rates by half a point in February and another half point at their next meeting in March.

You are viewing a screenshot of an interactive graphic. This is most likely because you are not connected to the Internet or JavaScript is disabled in your browser.

The headline figure was less than the 9 percent expected by economists polled by Reuters. This came after data published on Tuesday showed that the eurozone’s gross domestic product expanded unexpectedly between the third and fourth quarters of last year. It now appears poised to avoid a winter recession despite higher energy prices and higher borrowing costs.

Separate data, also published by Eurostat on Wednesday, showed the region’s labor market remained resilient. The unemployment rate was unchanged at 6.6 percent in December, the lowest level since records began in 1995.

Fabio Balboni, an economist at lender HSBC, said the better data could mean the European Central Bank may be “more determined” to push ahead with rate hikes, with stronger-than-expected growth likely to boost core inflation.

Headline inflation is slowing in most developed countries, including the United States and the United Kingdom, reflecting the easing of global energy costs. However, measures of core inflation are a concern for policy makers. The US Federal Reserve is set to raise interest rates by 25 basis points later today, while the Bank of England is likely to raise its benchmark interest rate by 50 basis points on Thursday.

Recommended

The decline in the headline rate was driven by lower energy inflation, which slowed to 17.2 percent in January from 25.5 percent in the previous month. It is now less than half the peak of 41.5 percent in October.

However, food price inflation hit a new record of 14 percent in January, up from 13.8 percent in the previous month.

Inflation in the cost of goods also accelerated to a new record of 6.9 percent. This rate is falling in the US and the UK thanks to easing global supply chain disruptions and lower shipping costs.

Services inflation, the flagship of domestic price pressures, fell marginally to 4.2 percent in January from 4.4 percent in the previous month.

Inflation rates in January ranged from 21.6 percent in Latvia to 5.8 percent in Spain. Germany has not yet published its figures for January. Eurostat said inflation in the eurozone was calculated using its own estimates for the region’s largest economy.

However, its estimate did not take into account the removal of government subsidies, which had lowered the cost of household fuel bills in previous months.

Jack Allen-Reynolds, an economist at Capital Economics, said the lack of accurate information available on German inflation means that a sharp drop in the eurozone’s core rate “has to be taken with a pinch of salt.”

[ad_2]