The European Central Bank continues its fight against galloping inflation. The regulator is struggling to get price growth under control, but it has too few tools for this. The central bank's primary weapon in this battle is interest rate hikes, which in turn puts the European economy at risk.
The European Union has long been unable to find a middle ground and achieve its inflation target. When consumer price growth was extremely low, far below the preferred 2% level, the central bank tried its best to boost inflation. However, inflation in the region has gone beyond the acceptable range over the last few years. Now the regulator is forced to change its approach to monetary policy. According to Peter Vanden Houte, chief economist at ING, the ECB will likely need more interest rate increases to tame surging inflation. It is too early to debate whether the regulator will bring its deposit rate to 4%, but it is safe to say that it will stay the course on monetary tightening, the expert noted.
“Eurozone core inflation remained at 5.5% in July, and with base effects warping year-on-year figures, the important dynamic is inflationary evolution from month to month. While headline inflation has declined pretty rapidly, it remains above the ECB’s target of 2%, and core inflation looks set to be kept high by services inflation,” the economist said.
“If the central bank’s focus is on month-to-month development, then it may as such still opt to prolong its cycle of rate increases,” Vanden Houte concluded.
