Another rate hike on the cards for September as ECB warns inflation outlook hasn’t improved

The euro zone inflation outlook has failed to improve since a July rate hike, European Central Bank board member Isabel Schnabel said, suggesting she favours another large interest rate increase next month even as recession risks harden.

The central bank for the 19-country bloc surprised investors with a 50-basis-point rate hike last month, fearing that inflation, now approaching double-digit territory, was at risk of getting entrenched.

That move was not enough to alter the inflation outlook, however, and even a recession on its own would not be enough to tame price pressures, said Ms Schnabel, the head of the ECB’s market operations.

“In July we decided to raise rates by 50 basis points because we were concerned about the inflation outlook,” she told Reuters. “The concerns we had in July have not been alleviated... I do not think this outlook has changed fundamentally.”

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A rate hike in September is seen as a done deal, with policymakers split between 25 and 50 basis points. Ms Schnabel’s comments suggest she is likely to advocate a bigger increase.

Her comments come as euro zone inflation hit a new record high of 8.9 per cent in July, intensifying pressure on households.

Eurostat, the EU’s statistics office, said consumer prices in the 19 countries using the euro rose 0.1 per cent month-on-month in July for an 8.9 per cent year-on-year increase, the highest since the euro was created in 1999. This was up from 8.6 per cent the previous month and up from 2.2 per cent a year earlier.

The agency also noted the core measure, excluding the most volatile components and key for monetary policy, was also sharply up.

Eurostat said the highest contribution to the annual euro area inflation rate in July came from energy (+4.02 per cent), followed by food, alcohol and tobacco (+2.08 per cent), services (+1.60 per cent) and non-energy industrial goods (+1.16 per cent).

But even when these most volatile components are excluded, in what the European Central Bank calls core inflation and watches closely in interest rate decisions, prices still were 5.1 per cent year-on-year higher in July.

The rate recorded for the Republic of Ireland was 9.6 per cent, unchanged from the previous month. Eurostat uses the harmonised index of consumer prices (HICP) measure of inflation, which is different from the Central Statistics Office’s (CSO) consumer price index (CPI).

The CSO’s CPI put headline inflation here at 9.1 per cent in July.

The Eurostat figures indicated that the lowest annual rates were recorded in France, Malta (both 6.8 per cent) and Finland (8 per cent). The highest annual rates were recorded in Estonia (23.2 per cent), Latvia (21.3 per cent) and Lithuania (20.9 per cent).

— Additional reporting: Reuters