Signs reading ‘Price cut’ are seen on the shelves of a supermarket in Nice, France, June 15, 2023. REUTERS/Eric Gaillard/File Photo Acquire License Rights
FRANKFURT, Aug 31 (Reuters) – Euro-zone inflation proved unexpectedly resilient this month, although price pressures on underlying goods eased, giving ammunition to both supporters and opponents of another rate hike by the European Central Bank.
The ECB raised interest rates at an all-time high last year, the highest level in more than two decades. But as growth stalls and business and household sentiment deteriorates rapidly, the debate over how much more policy tightening is needed is heating up.
Headline inflation in the 20 countries that share the euro was unchanged at 5.3% in August, beating expectations of a fall to 5.1% as energy costs rose sharply over the month, Eurostat data showed on Thursday showed.
But a key underlying metric that filters out volatile food and energy prices fell to 5.3%, as expected, from 5.5% in July, despite little movement in service sector inflation.
Such mixed data is unlikely to settle the debate within the ECB, although it has prompted financial markets to revise their assessment of the likelihood of a rate hike in September to 33% from around 50% earlier this week. Market prices suggest they expect another rate hike this year, perhaps in October or December.
Robert Holzmann, Austria’s central bank governor and one of the most conservatives on the Governing Council that sets rates, said he was still leaning towards a rate hike but didn’t believe inflation data would matter.
“I haven’t made a decision because I don’t have all the data, but I wouldn’t rule out making an increase,” Holzmann told the Reuters Global Markets Forum.
“We’re not at peak yet (on interest rates); we might do another rate hike or two.”
MIXED VIEWS
Economists’ views were mixed, and few, if any, changed their previously published claims.
“The upward pressure on the base prices has thus eased further,” said Commerzbank economist Christoph Weil. “We still do not expect the ECB Governing Council to raise interest rates further at its September meeting.”
Others, with reservations, took the opposite view.
“The latest inflation figures increase the likelihood of another rate hike in September,” said Diego Iscaro of S&P Global Market Intelligence.
“However, this is far from a done deal and a rapidly deteriorating economic backdrop will still provide ample ammunition for the dovish Governing Council to argue for a pause.”
All of this suggests that the ECB’s debate will not be settled until new economic forecasts are presented to policymakers in the days leading up to the September 14th meeting.
Advocates of a pause in tightening argue that growth is now slowing rapidly and that the bloc’s economy, which has stagnated for the past three quarters, could even slip into recession if there is little recovery.
However, others say such a slowdown is desirable, particularly if it is intended to resolve a very tight labor market, as the underlying price pressures are far too high and could result in inflation stagnating above the ECB’s 2% target.
Service sector inflation, which the ECB is watching closely, fell only slightly to 5.5% this month from 5.6%, while unemployment figures released separately on Thursday showed that unemployment fell to a record low of 6.4 in July % lay.
ECB Executive Board member Isabel Schnabel, also a political hawk, argued that ever-cheaper market prices could weaken the impact of the ECB’s past monetary policy moves and put upward pressure on inflation.
“Real risk-free interest rates have fallen across the maturity spectrum and are now back to the levels seen at the February ECB Governing Council meeting as investors revised their expectations for economic growth, inflation and monetary policy,” Schnabel said in a speech frankfurt .
“This decline could thwart our efforts to return inflation to target in a timely manner.”
Reporting by Balazs Koranyi; Edited by Catherine Evans
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