Tuesday's figures evidenced accelerating inflation in the euro area. Meanwhile, we are witnessing an unexpected slowdown in core inflation, which creates prerequisites for a more cautious tightening of monetary policy during the upcoming meeting of the European Central Bank.
As seen from the report, there was a drastic acceleration in inflation as compared to double-digit rates late last year. That being said, it is still too high which explains why the ECB is forced to continue hiking interest rates. What remains open for debate is how much it will actually be hiked. Some central bank officials believe that it will be 25 basis points while others predict 50 basis points.
The price surge in the euro area hit 7.0% in April compared to 6.9% a month earlier, which coincided with analysts' expectations.
In the meantime, core inflation has remained the focus of the past few months. Its unexpected rise points to an increase in price pressure and also implies that the European Central Bank does not have a clear idea of where prices will be rising next.
As encouraging developments for the ECB, inflation in processed foods, alcoholic beverages, and tobacco products decelerated by a full percentage point, to 14.7%. This creates the prerequisites for the much-anticipated turn in food prices.
In the course of the last six meetings, the European Central Bank has hiked interest rates by at least 0.5% each time.
Some policy-makers including the Governor of the Banque de France François Villeroy de Galhau favored more deliberate steps this month, claiming that the ECB has already raised borrowing costs dramatically to limit the economy.
At the same time, others including Member of the ECB’s Executive Board Isabelle Schnabel mentioned that a 0.5% step should remain one of the options since the rise in prices is steady, and this, in turn, increases the risk that it may stabilize above the ECB's 2% target.
According to market players’ expectations, the ECB's deposit rate may go up to about 3.75% by the end of summer. That said, expectations regarding interest rates have been volatile in the last few months, fluctuating widely after the March turmoil in the financial market.
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