Euro-Zone Inflation Stops Slowing in Alarm Signal for ECB
(Bloomberg) -- Euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether pressures are too persistent to risk a pause in interest-rate hiking.Most Read from BloombergUS Health Officials Urge Moving Pot to Lower-Risk CategoryUBS Smashes Banking Record as It Absorbs Credit SuisseHong Kong to Shut Down City Before Super Typhoon Saola HitsSingapore S$1 Billion Laundering Scandal Embroils Its Banking GiantsStocks Up Again in ‘Bad N Euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether pressures are too persistent to risk a pause in interest-rate hiking. Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. The ECB is preparing to judge in two weeks’ time whether weakening growth momentum across the 20-nation bloc will sufficiently cool price pressures and ultimately deliver 2% inflation. Traders continued to pare bets on further increases in ECB borrowing costs after the data, pricing in a 30% chance of such a move next month. The euro extended losses and bonds gained as the end of the central bank’s tightening cycle comes into view. The main piece of the picture for ECB officials is set to be ready by the time they travel to Frankfurt for their Sept. 13-14 meeting.
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(Bloomberg) -- Euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether pressures are too persistent to risk a pause in interest-rate hiking.
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Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. Economists had anticipated weakening. An underlying measure stripping out volatile items slowed as expected to reach exactly the same level as the headline gauge.
The so-called core number is the most significant for ECB officials preparing to judge in two weeks’ time whether weakening growth momentum across the 20-nation bloc will sufficiently cool price pressures and ultimately deliver 2% inflation. If not, they may hike for a 10th consecutive time, bringing the deposit rate to a record 4%.
Traders continued to pare bets on further increases in ECB borrowing costs after the data, pricing in a 30% chance of such a move next month. The euro extended losses and bonds gained as the end of the central bank’s tightening cycle comes into view.
The quandary for officials was articulated earlier on Thursday by ECB Executive Board member Isabel Schnabel, in remarks that appeared to chime with comments by her Finnish colleague, Tuomas Valimaki, who said earlier in the week that the outcome is “totally open.”
“Should we judge that the policy stance is inconsistent with a timely return of inflation to our 2% target, a further increase in interest rates would be warranted,” Schnabel said. “Should our assessment of the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, we may afford to wait until our next meeting to gather more evidence.”
President Christine Lagarde herself has avoided a clear statement of intent, while some of her more hawkish members have already signaled a preference for another quarter-point step.
Germany’s Joachim Nagel said in a Bloomberg TV interview last week that he’s not yet convinced that inflation is under control, while Latvia’s Martins Kazaks argued it’s better to err on the side of tighter policy. Austria’s Robert Holzmann has signaled he may push for a hike too.
The euro-zone data, along with a report on Wednesday showing a pickup in expectations, might be evidence supporting their case. Stronger-than-expected consumer-price pressures in Germany and France — once again driven by energy — and a pickup in Spain, cohere to that theme.
A slight hint of encouragement for policymakers was evidence of slowing services inflation in the overall regional numbers. That’s now at 5.5%, down from 5.6% in July. Italy’s consumer-price growth also slowed more than anticipated to 5.5%.
Dovish officials — such as Portugal’s Mario Centeno — are likely to emphasize risks to the economic outlook that are starting to materialize.
Confidence is deteriorating quickly, and the latest survey of purchasing managers showed a manufacturing slump deepening with services shrinking as well for the first time this year. A sentiment survey by the European Commission released on Wednesday showed worsening for a fourth month.
A prevailing worry is malaise in China’s economy, which is hurting export prospects across the continent. Trade already weighed on output in Germany, the motor of the euro region, in the three months through June.
Hamburg’s port saw a steep decline in shipping volumes during that quarter and predicts a “significant decrease” in revenue at its Port Logistics subgroup.
Schnabel acknowledged the risks, saying that recent developments “point to growth prospects being weaker than foreseen in the baseline scenario,” while cautioning that “there are indications that the euro area economy may not be on the brink of a deep or prolonged recession.”
Inflation is also worrying her however, sharpening the dilemma for policymakers this month.
“Underlying price pressures remain stubbornly high, with domestic factors now being the main drivers of inflation in the euro area,” she said.
The main final piece in the picture for ECB officials is the institution’s staff projections, which will be ready by the time governors travel to Frankfurt for their Sept. 13-14 meeting.
The last round in June showed inflation above the 2% target through 2025, with underlying price pressures stronger than those including food and energy.
--With assistance from Joel Rinneby, Barbara Sladkowska and Constantine Courcoulas.
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Topik: Inflation