Core inflation slows in eurozone, supporting smaller ECB rate hike

UNDERLYING inflation in the euro area eased for the first time in 10 months, backing the case for the European Central Bank (ECB) to slow the most aggressive interest-rate hiking campaign in its history later this week.

Consumer prices stripping out volatile items like fuel and food costs rose 5.6 per cent from a year ago in April – down from March’s record 5.7 per cent advance and in line with the median estimate in a Bloomberg poll of economists.

Headline inflation, meanwhile, ticked up to 7 per cent – a touch more than the 6.9 per cent analysts anticipated and still far above the 2 per cent target. Services prices and a less favourable annual comparison for energy costs than in March drove the acceleration.

The report by the European Union’s statistics agency on Tuesday (May 2) could further tilt the debate over how much the ECB should raise borrowing costs on Thursday toward those advocating a downshift to a quarter-point.

With the core price gauge now heading lower and a survey of bank lending published earlier on Tuesday showing credit standards tightening by more than lenders had expected, arguments to maintain the half-point pace of recent meetings are weakened.

Economists and money-market investors reckon policymakers will opt for the smaller of the two rate moves, having already enacted 350 basis points of tightening since last summer to beat back the euro era’s most severe bout of inflation. A Bloomberg poll last week showed the deposit rate, currently at 3 per cent, may peak at 3.75 per cent in July.

With the main gauge of price gains down from its double-digit peak thanks to the reversal in natural gas costs, ECB has zeroed in on underlying pressures as the key factor in its decision-making.

The measure has been driven largely by robust demand for services after consumers emerged from the pandemic with pent-up demand and stacks of savings. But officials have also begun looking more closely at the role of fatter profit margins, while the strongest pay demands in years remain a concern.

The ECB is particularly concerned about the interaction of those dynamics. Vice-President Luis de Guindos said last week that “any sort of conflict between wages, profits and the public sector would be extremely detrimental,” with the potential to trigger a reaction from the central bank.

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Executive Board member Isabel Schnabel has warned that the persistence of core pressures and strong momentum in food costs mean “it’s far too early to declare victory on inflation.” She said officials don’t only need to see a turning point, but a sustained decline “that gives us confidence that our measures are starting to work.”

The turmoil that began with the demise of Silicon Valley Bank in March, however, may have done some of ECB’s work for it by curbing the flow of loans to an economy that only just managed to avoid a winter recession. 

Tuesday’s Bank Lending Survey showed credit standards “tightened further substantially” in the first quarter as risk tolerance waned. Net demand from firms declined by the most since the global financial crisis, and more than lenders had foreseen. BLOOMBERG