Euro zone inflation rose further above the European Central Bank’s target in April, increasing the chances of an interest rate rise in June, despite a weakening of economic sentiment and household demand. Inflation in the 17 countries using the euro raised to 2.8 percent year-on-year this month from 2.7 percent a month earlier, the highest level since October 2010, when it was 3.2 percent. Consensus expectations had been for a flat reading compared to March ahead of next Thursday’s European Central Bank meeting on interest rates. Analysts said the numbers raised the odds on a rise in rates in June.
“Although, we expect a rate increase at the July meeting, the balance of risks is tilted towards an earlier move,” said Aline Schuiling, senior economist at ABN AMRO.
The ECB raised its main interest rate from record lows of 1.0 percent to 1.25 percent in April, concerned about the impact on consumer prices of rising costs of energy and food. “The upside surprise relative to our forecast may be due to a stronger-than-expected impact of the late Easter, meaning that core inflation probably was a touch firmer than we had thought,” said Marco Valli, economist at Unicredit.
“We see inflation hovering around the current level for some time, with a further acceleration to three percent likely towards the end of the summer.” Other data this month, however, has suggested growth in both Germany and the euro zone is peaking and figures from Spain, the biggest economy under threat in Europe’s debt crisis, showed unemployment soaring and retail sales sinking. A monthly European Commission survey showed economic sentiment in the euro zone as a whole fell for the second month in a row to 106.2 in April, down from 107.3 in March and below market expectations of a decline to 107.0.
“The combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone,” said Martin van Vliet, economist at ING. The decline in sentiment ran through all sectors of the economy except construction, with consumer optimism falling the most to -11.6 from -10.6 in March. ECB data also showed that the annual growth rate of loans to the private sector in the single currency area slowed in March, bucking expectations for a rise, but M3 money supply growth accelerated. Belgium, a bellwether for the euro zone economy, reported faster than expected first quarter economic growth of 1 percent quarter-on-quarter, against 0.6 percent expected on average by economists polled by Reuters. “Monetary data continue to point to a modest recovery in euro area money and loan growth,” said Christoph Balz, economist at Commerzbank.
“While the data in itself do not indicate upside risks to price stability that require further monetary tightening, they are further proof that the economic situation has changed substantially since 2009 – which is why the ECB thinks that extremely low interest rates are no longer appropriate. GDP data for the whole euro zone is due on May 13. More evidence of weakening household demand could be seen in retail sales data. Sales in Germany fell in March, defying expectations of a rise as consumers bought fewer groceries and textiles during a month when inflation surpassed the 2 percent threshold. Adjusted for consumer price rises, sales declined by 2.1 percent month-on-month and by 3.5 percent year-on-year. The drop in consumer demand was more pronounced in the “peripheral” euro zone countries seeking to win back market confidence in their public finances with tough austerity measures.
