Thanks to inflation, it is looking more likely that euro zone interest rates will go up to 4.24% in July, despite increasing evidence of a sharp slowdown in the region’s economic activity.
Economists became more convinced following the latest comments by European Central Bank President Jean-Claude Trichet. He told European lawmakers that the ECB is on a heightened state of alertness about inflation: “Upside risks to price stability over the medium term have intensified further over the past few months, in a context of very vigorous money and credit growth. The governing council remains particularly concerned that current elevated inflation rates, which have proved higher and more persistent than previously foreseen, may become entrenched in private inflation expectations and lead to second round effects in price and wage setting.”
The European Central Bank has forecast euro zone inflation will be at an annual rate of 3.4% this year and that the region’s economy will grow by just 1.8%. The euro has risen in value by 17% against the dollar since a year ago.
Inflation is being pushed up by oil prices particularly, which have doubled in the last 12 months, coming close to $140 a barrel. The question now is if the cost of borrowing is increased next month, will it be the start of a series of rate hikes? In his comments, Trichet played down that idea.