FRANKFURT (Reuters) – Euro zone inflation accelerated last month but underlying price growth eased unexpectedly, adding to arguments for a smaller interest rate hike at the European Central Bank’s regular policy meeting on Thursday.
Inflation has slowed sharply from double-digit readings late last year but remains far too high, making another rate hike a necessity and leaving only its size up for debate, with ECB policymakers split between a 25 and a 50 basis point move.
Overall price growth in the 20 nations sharing the euro currency picked up to 7.0% in April from 6.9% a month earlier, Eurostat said on Tuesday, in line with expectations in a Reuters poll of economists.
But the focus in recent months has been squarely on underlying or core inflation, a surprising rise in which has suggested that price pressures are mounting and that the ECB lacks a firm understanding of where inflation could be heading.
Excluding volatile food and fuel prices, core inflation slowed to 7.3% from 7.5%, while an even narrower measure, which excludes alcohol and tobacco, slowed to 5.6% from 5.7%, coming below forecasts for 5.7% for its first decline since last June.
In a hopeful development for the ECB, processed food, alcohol and tobacco inflation slowed a full percentage point to 14.7%, suggesting that a long-awaited turnaround in food prices may now be happening.
The small core inflation surprise comes as the ECB’s quarterly survey of bank lending pointed to an exceptionally large drop in credit demand amid tighter lending criteria, adding to the case for a smaller rate hike.
The ECB has raised interest rates by at least 50 basis points at each of its past six meetings.
Some policymakers, including French central bank chief Francois Villeroy de Galhau, have made the case for a more measured move this month, arguing that the ECB has already lifted borrowing costs sharply enough to restrict the economy.
But others, including board member Isabel Schnabel, have said that a 50 basis point move needs to remain among the options because price growth is proving sticky, raising the risk that it could level off above the ECB’s 2% target.
Nearly all 26 members of the Governing Council appear to agree that more policy tightening is required after a record 350 basis points of rate increases since July.
A key worry is that wage growth is now accelerating above expectations and this will drive up the cost of services, the single largest item in the consumer price basket.
Services inflation accelerated to 5.2% from 5.1% but the price growth of non-energy industrial goods, another crucial segments, slowed to 6.2% from 6.6%.
Investors see the ECB’s 3% deposit rate rising to around 3.75% by the end of the summer although rate expectations have been volatile in recent months, moving in a wide range since the financial market turbulence of March.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
