Spanish and German inflation puts spotlight back on ECB interest rate intentions

The sustained surge in the cost of living is putting further pressure on Europe's central bank to raise interest rates

ECB chief economist Philip Lane: The former Irish central bank head says ECB should raise interest rates by 25 basis points in July and September. 

New figures showing that consumer inflation jumped again in Germany and Spain this month has again raised the risks that the ECB will be forced to hike interest rates aggressively this year.

Consumer prices rose by an annual 8.7%, while German import prices registered their biggest increase since September 1974.

The Spanish 12-month inflation rate resumed its upward trajectory in May after a dip in April. Spanish annual inflation accelerated to 8.7% in May, up from 8.3% the previous month, its statistics office said.

Twelve-month inflation stood at 9.8% in March, its highest level since 1985, while annual inflation was higher than the 8.3% forecast by analysts.

Core inflation up to 4.9%

Spain’s core inflation, which strips out volatile food and energy prices, rose to 4.9% year-on-year in May, a 26-year high, from 4.4% a month earlier, the data showed.

The economic fallout from Russia’s invasion of Ukraine has fuelled inflation worldwide, especially through increasing prices of energy and grains.

May figures for Ireland will be released in the coming weeks, but annual inflation in April had reached 7% in April, and economists predicted it will peak at around 8% in the summer months.

However, the latest readings from Germany and Spain put the spotlight back on the rate-hiking plans of the ECB.

“Today’s inflation numbers, along with a risk-on sentiment are putting upside pressure on [Government] yields,” said Chris Attfield, European rates strategist at HSBC.

It would be unwise to rule out a 50 basis points rate hike in July, but it’s pretty clear there isn’t a consensus in the government council for that size of increase.

“We see the eurozone depo rate rising quickly as the ECB plays catch-up with the Fed and the Bank of England, but we think the focus in the second half of this year will shift from inflation to growth risks,” he added.

The ECB should raise interest rates by 25 basis points in July and September, the ECB’s Philip Lane, the former governor at the Central Bank of Ireland, told a Spanish newspaper.

However, money markets are pricing in 110 basis points, or 1.1%, of ECB rate increases by the end of the year, including a 30% chance of an additional 25 bps move beyond the fully priced 25 bps in July.

• Reuters and Irish Examiner