High inflation in the euro area due to the weight of policy makers to increase interest rates

The International Monetary Fund recently said that taming inflation while avoiding recession was the way to go The biggest challenge in Europe In the months ahead, as the continent continues to absorb the impact of the war in Ukraine on its economy.

So far, the European Central Bank’s campaign to raise interest rates has helped push headline inflation down from a peak of 10.6% last October. The eurozone has avoided recession, but economic growth remains modest.

Lending data released on Tuesday by the central bank showed that demand for consumer credit was weakening, as banks made it more difficult for borrowers to obtain credit and higher interest rates on borrowing caused demand to decline, further slowing the economy.

But policymakers warn that they are looking for signs that prices will fall over the long term.

“We should see a sustained decline in core inflation which gives us confidence that our policies are starting to bear fruit,” said Isabelle Schnabel, a member of the central bank’s executive board. he said in an interview With Politico last week.

The Baltics and Slovakia saw double-digit price increases, reaching 15 percent in Latvia. Some of the larger European economies with lower rates are dealing with pressure from workers seeking higher wages to keep up with the rising cost of living.

The varying rates also reflect domestic measures taken by governments to rein in energy prices. As the summer holiday season picks up, countries with strong tourism markets are also preparing to see the impact of higher service prices.

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In Germany, Europe’s largest economy, the annual rate of inflation eased to 7.6 percent from 7.8 percent in March. Food prices remained stubbornly high, while government intervention to tame energy costs began to take hold.

German public sector workers have reached an agreement to give 2.5 million employees a 5.5 per cent increase in wages next year. The agreement is expected to set a precedent for other wage talks and could threaten the European Central Bank’s forecast that wage growth in the eurozone will peak this year.

In France, which has been suffering for months from waves of strikes over the government’s decision to raise the retirement age, inflation rose to 6.9% in April from 6.7% in March, largely driven by energy, with prices for services also rising. a little.

In Spain, prices rose to 3.8 percent in April, from 3.1 percent in the previous month as food costs rose, even as energy prices, which jumped to record levels last year, continued to fall.

Inflation data will influence the European Central Bank’s decision on continuing to raise interest rates in an effort to bring down inflation. The bank’s board meets on Thursday, and most analysts estimate it will vote to raise interest rates by a quarter or half a percent.

The bank raised the deposit rate to 3 percent last month, the highest rate since October 2008, as it sought to cool demand and bring inflation closer to its 2 percent target.

“Even if headline inflation declines and will fall further, this is not yet the moment of relief,” said Carsten Brzeski, chief economist at ING Germany. β€œThe ECB does not want to repeat the previous mistake of underestimating inflation and will therefore be willing to go too far, even if it ultimately turns out to be a policy error.”

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