New spurt of euro area inflation. In August, the record level of 9.1% was reached, up from 8.9% in July and above the expectations of analysts who were still at + 9%. The flash estimate released today by Eurostat, the statistical office of the European Union, reinforces the arguments of those within the European Central Bank (ECB) pushing for a jumbo increase (+75 basis points) in interest rates in the meeting on Thursday 8 September.
The energy and food components are fueling the new rise in prices, with food inflation reaching 10.6%. L’core inflationnet of food and energy, it rose to a new high (+ 4.3% yoy), highlighting how price pressures continue to get wider.
The reaction of the markets was nervous with Piazza Affari, which dropped by more than 1% in the minutes following the exit of EU inflation, with the utility sector in great difficulty precisely because of the fear of a more aggressive ECB on rates. On bonds, yields again jumped up with the ten-year Bund in the 1.57% area, while the 10-year BTP rate went up to 3.94%, on the top since mid-June.
ECB divided on what to do in September
Some members of the ECB board of directors, including Isabel Schnabel, believe the central bank should focus more on inflation outcomes than projections as the war in Ukraine complicates predictions. Yesterday Glass Knot, number one of the Dutch central bank and member of the ECB, has called for a “rapid” normalization of monetary policy. Five other members of the Governing Council have publicly stated that they believe a rate change of more than 50 basis points should be discussed and money markets price 60% the probability of a 75 basis point increase to more than 60%. The chief economist stands out among the doves Philip Lane which proposes a “steady pace” of rate hikes.
And then?
“As the economy is slowing rapidly, and perhaps already contracting by this point, the question is how much the ECB needs to step on the brake,” argues Bert Colijn, senior economist at Eng. Another increase of at least 50 basis points. September seems to be the staple option, with hawks pushing 75bps. “The big question is how the ECB will respond later, if indeed the signs of economic difficulty become more evident and inflation remains strongly driven by supply-side factors,” Colijn remarks.
Economists at Oxford Economics predict that the ECB will opt for a 75bps rate hike in September by another 50bps in October and 25bps in December. given a higher inflation spike determined by energy prices. “We only see an accommodative pivot in 2023 after another 25bp move in February as we expect the eurozone to enter recession and signs of easing core inflation and weakening labor markets start to become more evident,” Oxford adds. Economics.