The European Central Bank (ECB) is currently facing slow growth and high inflation within the Eurozone. This in turn represents a significant challenge for the ECB as it works to maintain stability and promote economic growth in Europe.
With little choice but to put even more financial pressure on households and businesses, the ECB faces an uncertain future amid a deluge of economic data that makes its role in stabilizing the region’s economy even more challenging.
Interest rate hikes are very likely
In the first quarter of the year, economic output in the Eurozone increased by only 0.1% as domestic consumption stagnated in many economies.
This stagnation indicates that rising inflation and falling real incomes are having a negative impact on consumers. Growth in the region was mainly driven by exports, thanks to a rebound in global trade as China reopens its post-pandemic economy.
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Despite the sluggish growth, national data indicate that price growth is slowing down only, putting pressure on the ECB to continue its aggressive rate hikes.
For example, many commentators believe that the ECB is likely to continue raising rates at next week’s central bank meeting, even though growth across the eurozone is not far from flattening.
Inflation remains high
Inflation in the Eurozone remains a major concern as it has remained well above the ECB’s target of 2%. April’s data showed mixed results: while Germany experienced a slight decline in inflation (7.6%, down from 7.8%), France and Spain saw inflation rise, mainly due to reductions in energy subsidies.
However, there are indications that food prices could fall in Germany, France and Spain, which could provide some relief for the ECB.
The forthcoming release on May 2 of inflation data for the entire Eurozone, together with an ECB survey of banks, will play a crucial role in the central bank’s decisions on interest rate hikes.
Money markets are currently forecasting another 70 basis points of interest rate hikes by the ECB by October, possibly followed by cuts next year.