Speculation that the European Central Bank (ECB) will opt for at least one more rate hike before pausing increased on Wednesday after inflation figures in three euro zone countries, including Ireland, rose unexpectedly.
The latest flash estimate for the Harmonised Index of Consumer Prices (HICP) here rose to 4.9 per cent in August, up from 4.6 per cent in July.
The annualised rate of price growth in the Irish economy climbed on the back of higher energy and transport costs, which led to pricier home heating oil, transport fuels and airfares (energy prices were still down in year-on-year terms). The increase here was mirrored in Germany and Spain and comes ahead of the official euro zone inflation figures on Thursday, all of which will feed into the ECB’s rate-setting meeting in two weeks.
Money markets have raised their bets on a September rate hike from the ECB, which would be the 10th if enacted, pricing in a 60 per cent chance of a 25 basis-point move.
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Federal Reserve chief Jerome Powell devoted much of his keynote speech at the annual three-day symposium in Jackson Hole, Wyoming last weekend to the upside risks for inflation.
Analysts saw that as a change from the balanced tone he struck in July after the Fed’s most recent rate hike. “We’re coming to a place where there really are risks on both sides,” Powell had said. The influential Fed chair’s more hawkish tilt comes amid “signs the economy may not be cooling as expected”. He cited recent strength in consumer spending, above-trend growth and a pickup in housing activity.
We’ll get growth figures for the Irish economy later this week but one of the most unpredicted and head-scratching phenomena is the strength of growth, labour markets and consumer spending here and across the euro zone in the wake of nine straight ECB rate hikes. Typically such a compression of borrowing power would trigger a pullback in spending and investment with knock on effects for growth and employment.
There’s perhaps an element of lag in all of this of course. Monetary policy takes a while to filter through the economy. Underlying inflation is also being underpinned by higher wage demands with workers seeking compensation for cost-of-living pressures.
