ECB must decide on interest rates as inflation rises and economic growth remains sluggish in the eurozone
Inflation in the 20 countries using the euro rose to 2.6 percent in July, as reported by BNN Bloomberg.
This increase remains above the European Central Bank’s (ECB) target, complicating the ECB’s decision on whether to cut interest rates to stimulate growth amid a sluggish economic recovery.
According to Eurostat, the EU statistics agency, inflation increased from 2.5 percent in June. Services inflation, closely monitored by the ECB, remained high at 4.0 percent, slightly down from 4.1 percent.
The ECB faces a challenging decision at its next meeting on September 12. In June, the ECB made a tentative interest rate cut, reducing its benchmark rate by a quarter percentage point to 3.75 percent.
However, the ECB paused further cuts in July, with President Christine Lagarde indicating that future decisions would depend on incoming data.
Central banks, including the ECB and the US Federal Reserve, raised interest rates rapidly to combat a surge in inflation driven by Russia’s invasion of Ukraine, higher energy prices, and the post-pandemic economic rebound, which strained supply chains.
Europe was particularly affected by higher energy prices after Russia cut most of its natural gas supplies.
Energy prices have since fallen, and inflation has decreased from its peak of 10.6 percent in October 2022. However, it remains between two and three percent, above the ECB’s two percent target, considered optimal for economic stability.
Rate hikes aim to reduce inflation by increasing the cost of borrowing, thereby cooling demand for goods, and easing price pressures.
Nonetheless, higher rates can also slow economic growth, and recent data suggest that Europe’s economy is struggling to recover convincingly after more than a year of near-zero growth.
Gross domestic product (GDP) increased by 0.3 percent in each of the first two quarters of this year, showing improvement from previous zero or negative growth rates. However, indicators such as S&P Global’s purchasing managers’ index suggest that the economy continues to grow only marginally.
