ECB likely to hike interest rates sharply

The euro symbol in front of the European Central Bank headquarters in Frankfurt, Germany

Some members of the ECB's rate-setting governing council said recent criticism of the Bank of England (BoE) over its efforts to reduce inflation had served as a warning during private discussions at the ECB's annual meeting in Sintra, Portugal.

The ECB's concerns were underscored on June 29 when Germany reported that inflation had risen faster than expected and even as Spain became the first major eurozone economy to see inflation fall below 2% in nearly two years.

Germany's 6.8% inflation rate in June was four times higher than Spain's 1.6%, highlighting the dilemma the ECB faces over how to rein in inflation. Eurozone inflation is expected to have eased to 5.6% in June when new price data is released on 30 June, still above the ECB's 2% target but down from a peak of 10.6% in October as energy and food prices continued to fall.

Another ECB board member said that if the bank continued to raise interest rates and inflation fell faster than expected, it could be considered a success. But if inflation exceeded expectations and the bank was forced to accelerate the pace of rate increases, as the BoE has done, the ECB would be considered a failure.

UK inflation beat forecasts at 8.7% in May, significantly higher than the eurozone's 6.1% or the US rate of 4%, putting pressure on both the BoE and the UK government. Core prices, which exclude energy and food, hit 7.1%, a 31-year high. "The UK situation is something we can learn from," said an ECB board member. "We need to show that we are determined to act to avoid a similar situation to the BoE."

Speaking at the Sintra Conference, ECB President Christine Lagarde said the bank would raise interest rates again in July “unless there is a material change in the outlook” and ruled out a further rate hike in September.

According to VNA