ECB set to raise rates despite fall in eurozone inflation

Eurozone rate-setters are set to raise borrowing costs by another half percentage point on Thursday, after figures published today showed underlying inflationary pressures in the region remain uncomfortably high.

The regional rate for core inflation – which excludes changes in food and energy prices, and is considered the best measure of the stickiness of price pressures — remained unchanged at an all-time high of 5.2 per cent in the year to January.

The figure, coupled with the resilience of eurozone output during the final quarter of 2022, all but confirms the European Central Bank will raise its deposit rate by another half a percentage point to 2.5 per cent at around lunchtime on Thursday.

The bank raised rates by 2.5 percentage points over the second half of 2022 in response to inflation, which hit a record high of 10.6 per cent in October. The headline rate fell from 9.2 per cent in the year to December to 8.5 per cent last month – still more than four times the ECB’s 2 per cent goal.

Anna Titareva, economist at Swiss lender UBS, said the ECB would want to see improvement in the “broader inflation environment” before changing course on its monetary policy.

“The jump in core inflation in some key countries [such as Spain] will be enough for the central bank to confirm its current hawkish stance,” said Bert Colijn, economist at ING Bank.

Ken Wattret, head of European analysis at S&P Global Market Intelligence, a data firm, said rate-setters remained “on track” to raise rates by half a point in February and by a further half-point at their next meeting in March.

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The headline figure was lower than the 9 per cent forecast by economists polled by Reuters. It came after data published on Tuesday showed eurozone GDP unexpectedly expanded between the third and fourth quarter of last year. It now looks set to avoid a winter recession despite the surge in energy prices and rising borrowing costs.

Separate data, also published by Eurostat on Wednesday, showed that the region’s labour market remained resilient. The unemployment rate was unchanged at 6.6 per cent in December, the lowest since records began in 1995.

Fabio Balboni, economist at lender HSBC, said the better data would mean the ECB may be “more determined” to press on with rate rises, with stronger-than-expected growth likely to boost core inflation.

Headline inflation is slowing in most advanced countries, including the US and the UK, reflecting the easing of global energy costs. However, measures of underlying inflation are a concern for policymakers. The US Federal Reserve is set to raise interest rates by 25 basis points later on today, while the Bank of England is likely to increase its benchmark rate by 50bp on Thursday.

The decline in the headline rate was driven by falls in energy inflation, which slowed to 17.2 per cent in January from 25.5 per cent in the previous month. It is now less than half of the peak of 41.5 per cent in October.

However, food inflation hit a fresh record high of 14 per cent in January, up from 13.8 per cent the previous month.

Inflation in the cost of goods also accelerated to a fresh record high of 6.9 per cent. That rate is declining in the US and UK thanks to the easing of global supply chain disruptions and the fall in shipping costs.

Services inflation, a bellwether of domestic price pressures, marginally declined to 4.2 per cent in January from 4.4 per cent in the previous month.

January’s inflation rates varied from 21.6 per cent for Latvia to 5.8 per cent for Spain. Germany has not yet published its figures for January. Eurostat said eurozone inflation had been calculated using its own estimates for the region’s largest economy.

Its estimate did not, however, take into account the removal of government subsidies, which had lowered the cost of households’ fuel bills in earlier months.

Jack Allen-Reynolds, economist at Capital Economics, said the lack of accurate information available on German inflation meant the sharp fall in the eurozone headline rate “should be taken with a big pinch of salt”.