The ECB takes action. We are moving towards an increase in rates

It now seems certain that the Bce next week, precisely on June 11th, he will decide to increase the rates by 0.25%, bringing them to 2.25%: it would be the first time in almost three years.

The pressures on prices unleashed by the war in Irandue to the prices of petroliumthey made theinflation in the Eurozone at 3.2% in May, the highest since September 2023 and the Eurotower wants to take action. Furthermore, it is the third consecutive month in which price growth exceeded the medium-term objective of 2%.

Energy and core inflation rising

Solo energy it cost 10.9% more than a year ago, up slightly from 10.8% in April. Second Claus Visteseneconomist at the consultancy firm Pantheon Macroeconomics, interviewed by FT, the inflation data “will be more than sufficient to justify a rate increase by the ECB next week”. Even thecore inflationwhich excludes volatile food and energy prices, rose 0.3 percentage points to 2.5%, slightly higher than the 2.4% expected by analysts and the highest level in more than a year.

Analyst ratings

This acceleration in core inflation is even “more worrying” than the increase in overall inflation, Francesco Pesole, FX strategist at ING, told the FT. This “reinforces the need to maintain a restrictive stance”, he added.

The position of the hawks in the ECB

The “hawks” inside the steering Committeeincluding the chief economist of the BCE Philip Lane and the member of the executive committee Isabel Schnabelhave prepared the ground in recent weeks for a probable increase in interest rates warning that high oil prices were fueling inflation.

Probability of upside and economic context

After the publication of the data that proved them right, according to operators, the percentage chance that the ECB will raise rates to 2.25% is 95%. However, it would not be a decision taken lightly because according to analysts the ECB is facing one stagflationary shock.

The risk of stagflation

That is to say, it is that particular situation in which while inflation is running, at the same time (in this case due to the war) economic activity slows down. And typically, when the recovery weakens, central banks are reluctant to raise rates because doing so could depress the economy even more.

Economic indicators still solid

According to analysts, however, this is not the case as the Manufacturing PMI has held up so far, despite the deceleration in May. Even if consumption is falling, the prospects for families are not encouraging and the labor market is just a breath away from its historic low, these indicators have not weakened enough for the ECB to postpone a rate increase in the face of greater inflationary pressure.

A limited and prudent squeeze

But observers also point out that the increase in rates of a quarter of a point does not necessarily mean that a recovery phase has been started monetary tightening. The potential costs of a quarter-point increase from the current 2% level are minimal: unlike the Federal Reserve or of Bank of Englandthe ECB is in a neutral position and a small increase would still keep it within its neutral range.

Inflation control objective

The increase would instead only be aimed at dampening inflation expectations, while waiting to understand how the geopolitical situation will evolve. In short, the mood of the meeting on 11 June will be that of prudence, as summarized by the governor of the Bulgarian central bank Dimitar Radev: “The cost of acting too late may exceed the cost of acting a little early.”