Inflation Euro zone ahead of April 2023 ECB rate decision

The euro zone’s core inflation rate rose in April, well above the European Central Bank’s target, but core price growth showed a surprising slowdown, according to preliminary data released on Tuesday.

According to Eurostat, headline inflation was 7% for the month after falling to 6.9% in March. At the same time, core inflation, which excludes food and energy prices, was 5.6% in April – down from 5.7% in March. Analysts polled by Reuters had estimated 7% for headline inflation and 5.7% for core inflation.

The latest figures come days before the ECB announces a new monetary policy decision on Thursday. Rather than providing some clarity on how much the Fed might raise rates, the latest numbers cloud the picture somewhat.

Market players are debating whether the central bank will hike by 50 or 25 basis points on Thursday. On the one hand, a rise in core inflation could prompt the ECB’s hawkish members to argue for another 0.5 percentage point hike. On the other hand, an unexpected slowdown in core price growth would tip the balance towards a more unfavorable position, resulting in a compromise rate hike of 25 basis points.

The central bank began its current hiking path when it brought its key rate from -0.5% to zero in July 2022. The ECB’s key rate currently stands at 3%.

Despite steady rate increases, inflation remains above the ECB’s target of 2%. Estimates released last week by the International Monetary Fund said the ECB’s target would not be reached until 2025.

“Further tightening is needed, and once a terminal rate is reached, that terminal rate must be maintained for a long period of time, because core inflation … is high, and it is very stable. And there is nothing worse than suspending the effort to fight inflation. Sooner, or abandoning it sooner, Because if you have to do it a second time, the costs to the economy will be very large,” Alfred Kammer, director of the IMF’s European department, told CNBC on Friday.