A new report has shown that the 20 countries which use the Euro as their common currency have collectively seen inflation creep back up to 2.6% in July, stubbornly above the European Central Bank’s target.
This presents a dilemma to the ECB as it weighs its next decision on whether to cut interest rates in a bid to boost growth as the economy struggles to stage a convincing recovery after a long stretch of sluggishness.
Inflation increased by 10 basis points, from 2.5% in June, according to official figures from the EU statistics agency Eurostat. Services inflation, a figure closely watched by the ECB, remained elevated at 4.0%, down from 4.1%.
The uptick will intensify discussions around the ECB’s next move at its upcoming meeting on 12 September. The central bank made a tentative interest rate cut in June, lowering its benchmark rate by a quarter percentage point to 3.75%. The bank’s governing council then hit the brakes at its July meeting, with ECB President Christine Lagarde saying the bank would take its next decisions meeting by meeting based on incoming data about inflation and the economy’s performance.
The ECB along with other central banks, including the US Federal Reserve, rapidly raised interest rates to combat a spike in inflation sparked by Russia’s invasion of Ukraine and higher energy prices as well as by the sudden rebound of the economy after the pandemic, which strained supplies of parts and raw materials. Europe in particular was hit by higher energy prices after Russia cut off most supplies of natural gas.
However, the move to raise interest rates has resulted in slowing growth, as the cost of borrowing has skyrocketed.
Used as a monetary policy tool, hikes in interest rates can help combat inflation by raising the cost of credit for buying things, cooling demand for goods and taking the pressure off prices. But higher rates can also have a negative impact on growth, and recent economic data have been downbeat as Europe struggles to show a convincing recovery after more than a year of near-zero growth figures.