Threat of Inflation Looms Over Spain, France & Germany
The debate over whether the European Central Bank (ECB) will raise interest rates by 25 basis points at its upcoming meeting on September 14th continues. Recent data reveals a slowdown in Germany’s inflation at a rate lower than expected, contrasting with an increase in inflation in Spain. Although inflation in Spain remains relatively low, it accelerated in August, with consumer prices rising by 0.3% from July to 2.4%, primarily driven by fuel costs.
Additionally, recent figures show an acceleration of inflation in France, rising by 5.4% from August 2022, attributed to the cost of energy. August data for the entire eurozone, comprising 20 countries, confirms an overall inflation rate of 5.3%, defying expectations of a decrease to 5.1%.
This creates a dilemma for the markets regarding the potential ECB interest rate hike. Despite signs of an impending economic downturn in the bloc, market sentiment is leaning towards a rate hike, especially if there is evidence of robust consumer price growth. The prevailing sentiment suggests that the ECB might err on the side of caution and raise interest rates, particularly if underlying pressures persistently remain high.
While indications of an economic downturn across the eurozone are evident, investors believe that the price data may sway the ECB towards a 10th consecutive interest rate hike on September 14th. However, the doves on the ECB’s governing council may argue for a pause due to the rapidly deteriorating economic conditions in the eurozone.
Economists are divided on the prospect of a rate hike. Some argue against it, citing continued easing of upward pressure on underlying prices as a reason for the ECB to refrain from hiking interest rates. Conversely, opposing views suggest that the latest inflation figures could warrant one more rate hike. Regardless of the outcome, ECB President Christine Lagarde has kept her intentions undisclosed, leaving the decision yet to be revealed.