Eurozone inflation rises as policymakers consider another rate hike

The headline inflation rate in the Eurozone increased last month. It is therefore almost certain that the European Central Bank’s rate-setters will have to raise borrowing costs once again this week.

The official figures of the 20-country group showed that the annual inflation rate for consumer prices rose from 6.9% to 7.0% in April. This was in line with the expectations of economists and the first increase in price pressures since six months.

The core inflation rate, which excludes volatile items such as energy and food, also remains stubbornly high, at 5.6%, near a record.

Over the last year, the single currency has battled with high inflation. The first cause was the record rise in energy prices due to the war in Ukraine. Now, it is spreading into other areas like food and services.

The biggest contributors to inflation in April were food, alcohol and tobacco prices, which rose by 13,6%, compared with 15,5% in March. Eurostat figures show that energy prices contributed 2.5 percent to the annual inflation rate, up from the negative figure of the previous month.

The ECB has been forced to increase rates by the ECB from a close to zero rate last summer to 3.5 percent as of March due to strong inflationary pressures. Investors are now fully priced in for another rate hike from the central banks this week. Most economists expect a quarter-point increase.

Frederik Ducrozet is the head of macroeconomics research at Pictet Wealth Management. He said that a forward-looking ECB would move slowly from here and limit rate increases to 25 basis points, relying on data.

Separate data from ECB revealed that global financial turmoil forced eurozone lenders in March to reduce their lending to businesses and households. The much-anticipated bank survey found that the credit conditions for businesses in the eurozone increased at the beginning of the year to the highest level since the 2011 sovereign debt crisis.

The forced sale of Credit Suisse in March . First Republic, the second-largest bank in the United States, was forced to close this week due to banking fears.

According to the eurozone’s survey on lending, banks will continue to increase borrowing costs and reduce lending in the second half of the year. This should slow down the economy and dampen inflationary pressures.

Melanie Debono of Pantheon Macroeconomics said that the ECB is likely to make a final rate increase of a quarter-point in June.