European Central Bank under pressure from record inflation

The head of the European Central Bank could give more clues on Thursday on when the bank will start raising interest rates, as pressure mounts to follow the US, UK and other countries in adopting a harder line to fight soaring consumer prices.

People in the 19 countries that use the euro saw rising costs for everything from food to fuel as inflation hit an annual rate of 7.5% last month, the highest since statistics began in 1997.

Driven by rising energy prices since Russia invaded Ukraine, record inflation has sharpened focus on when the European Central Bank will take more drastic measures to control excessive price hikes for consumers. The Bank’s decision makers meet on Thursday.

Chairman Christine Lagarde opened the door to an interest rate hike later this year at a press conference after last month’s meeting, when the bank said it would accelerate the end of its stimulus efforts in the event of a pandemic. This is key to interest rate decisions, as the bank has promised that a rate hike will only follow the end of bond purchases.

The war in Ukraine has driven inflation to surprisingly high levels. Oil and gas prices rose on fears of a Russian cutwhich is the largest oil exporter in the world, and that the recovery from the COVID-19 pandemic is increasing the demand for fuel.

As inflation rises around the world, the US Federal Reserve has raised its benchmark short-term rate last month and indicated that it would continue to increase it sharply this year. The Bank of England has raised its key rate three times since December.

Yet the European Central Bank is in a different situation. Economists say much of US inflation is domestic in origin – a side effect of massive federal stimulus and support spending during the pandemic. Inflation in Europe, on the other hand, is largely imported by rising oil priceswhich are generally beyond the reach of interest rate policy that central banks control.

On top of that, rising inflation and supply bottlenecks are weighing on economic growth, leading to what some call “stagflation”. A combination of slow growth and high inflation, the phenomenon poses a dilemma for central banks: the rate hikes needed to fight inflation could also hurt growth and jobs.

A focus on consumer purchasing power has helped French presidential candidate Marine Le Pen, a far-right nationalist, narrow the polls gap against incumbent centrist Emmanuel Macron during the campaign leading up to the April 24 second round.

Inflation in Europe is expected to decline next year. How much of current inflation will eventually feed into the long-term economy is an open question.

Analysts said the European Central Bank will likely leave rates unchanged on Thursday and avoid giving a clear timetable for a hike.

Lagarde could emphasize lingering risks to the economy and shift his stance slightly toward a possible hike sooner rather than later — without making a clear commitment, analysts said.

According to Holger Schmieding, chief economist at Berenberg Bank, the main takeaways could be “an even stronger emphasis by the ECB on the risks to its outlook” and “an additional hint that the ECB may raise rates later. This year”.

Lagarde tweeted on April 7 that she had tested positive for COVID-19 and had mild symptoms. It remains to be seen whether she will hold her press conference in person at the bank’s headquarters in Frankfurt, Germany, or remotely.

ECB benchmark rates are at historic lows: zero for loans to banks and minus 0.5% on bank deposits, a penalty rate aimed at tricking them into lending money instead.

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