Interest rate rise likely over latest inflation figures

THE RISK of a further interest rate rise in June increased yesterday as data published by statistics body Eurostat showed that consumer prices in the euro zone raced ahead in April.

Despite weakening consumer sentiment, euro zone inflation rose further above the European Central Bank’s target this month, rising to 2.8 per cent year-on-year.

The inflation rate, which compares to a rate of 2.7 per cent in March, was higher than expected. The data swiftly sparked speculation that the ECB would move to increase its base interest rate at its June meeting.

The monetary authority raised the rate from its record low of 1 per cent to 1.25 per cent earlier this month, citing concerns about how the rising cost of energy and food could exert further inflationary pressures.

A further quarter-point rise in the ECB rate would add €32 a month to a typical €250,000 tracker mortgage being repaid over 30 years.

Austin Hughes, economist at KBC Bank, said the “disappointing” jump in inflation made it more likely that the ECB would adopt “a reasonably aggressive approach” compared to that of the US Federal Reserve or the Bank of England.

“Such action is not without significant risks,” he added.

Economists fear rate hikes will have a negative drag on the economies of the so-called “peripheral” euro zone nations, including Ireland, that have high deficits.

At the other extreme, there is a risk that soaring food prices could destabilise the societies and economies of emerging nations if left unchecked.

“The risk of a traumatic resolution to the current global price pressures can’t entirely be ruled out,” Mr Hughes said.

Brian Devine, economist at NCB Stockbrokers, said core inflation – which excludes energy, food and other volatile items – remained much lower in the euro zone than the ECB’s 2 per cent inflation target.

“I think they are making a mistake by doing it while countries on the periphery are struggling,” he said of the ECB’s rate-tightening cycle.

The ECB’s previous quarter-point rise in April was also a mistake, Mr Devine added, but the ECB had decided to stake its credibility on the rate hikes, he said.

Ensuring price stabilisation in Europe by keeping inflation at or below 2 per cent is the principal monetary policy of the ECB.

Other data this month has suggested growth in both Germany and the euro zone is peaking, and figures from Spain, the biggest of the economies under threat in Europe’s debt crisis, revealed surging unemployment and sinking retail sales.

A monthly European Commission survey showed economic sentiment in the euro zone as a whole fell for the second month in a row.

“Survey data from the European Commission clearly indicates that the combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone,” said Martin van Vliet, economist at ING. (Additional reporting: Reuters)