ECB may need further rate hikes as inflation risks stay elevated

Traders Union
All News
Financial News
ECB may need further rate hikes

Highlights

ECB policymaker Primoz Dolenc signals further rate hikes may be needed as September inflation risks remain elevated and geopolitical conflicts persist.
ECB deposit rate increased twice this year to 2.5% after inflation hit 3.8% in the latest reading, nearly double the 2% target.
Eurozone economic growth outperformed expectations in Q2 despite energy shocks, but rising long-term borrowing costs and food prices pose ongoing risks.

Inflation outlook keeps tightening bias in place

As reported by Reuters, ECB policymaker Primoz Dolenc says the central bank may need to keep raising interest rates because inflation risks remain tilted to the upside, although the timing and size of any move are still too uncertain to predict.

Dolenc, who heads Slovenia's central bank, says persistently elevated inflation in the ECB's September projections and the lack of resolution to conflicts in the Middle East, Ukraine and elsewhere support moving policy rates into more restrictive territory. He says decisions will be taken meeting by meeting, based on incoming data.

The ECB has raised its deposit rate twice this year to 2.5% after inflation climbed to nearly twice its 2% target last month. Dolenc says the latest 3.8% inflation reading was above expectations but was driven largely by energy, while core inflation remained relatively stable and suggested only limited pass-through into services and other underlying components.

He also says current data offer some reassurance because they do not point to broad second-round wage effects. Still, he warns that low natural gas storage levels ahead of winter could push wholesale gas prices higher and feed more quickly into retail prices.

Growth resilience and bond market risks shape policy debate

The inflation outlook is also being shaped by risks beyond energy. Dolenc says food prices could increase further because of high input costs, droughts and El Niño, while the euro zone's stronger-than-expected economic performance could itself add to price pressures.

Although the recent energy shock was expected to erase most of the bloc's growth this year, the economy is showing resilience similar to earlier crises. It expanded at its fastest pace in four years in the second quarter, above its potential rate.

At the same time, higher long-term borrowing costs are emerging as a key risk to growth. ECB board members Philip Lane and Isabel Schnabel have warned that rising yields may weigh on the economy more than previously expected, while some analysts are focusing on the higher premium investors now demand to hold French debt.

Dolenc pushes back against expectations of market intervention, saying monetary policy is still being transmitted efficiently across the euro area. He says broader financial conditions remain more or less homogeneous and that rising yields have not produced destructive effects in other parts of the economy.

In our earlier article on the selloff in European banking stocks amid surging bond yields, we explained how widening sovereign spreads and higher oil prices revived concerns that inflation could accelerate again. We noted that the pressure on lenders was tied to rising borrowing costs and the market’s sensitivity to debt valuations, with inflation worries amplifying risk-off sentiment across the sector.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.