Although eurozone development almost without interruption in the last two quarters, ECB looks poised for further rate hikes in the coming months, perhaps 75 basis points to raise the deposit rate from a roughly neutral 3.0% to a moderately restrictive 3.75%. While we expect the ECB to slow its pace of rate hikes from 50 bps to 25 bps at its meeting on Thursday, we also see a 30% chance that the hawks will take over with their calls for another 50 bps hike. Latest data for April inflation in the eurozone could play an important role in Thursday’s debate. Inflation rose to 7.0% in April from 6.9% in March. Despite a temporary surge, inflation will continue its downward trend.

The main effects from consumer price increases in 2022 led to a decline in the annual index in 2023. Companies may also soon stop passing on last year’s price increases to their customers. Following the drop in wholesale gas prices, household energy prices have already declined from 2022 levels. In April, the energy component contributed 0.4 percentage points to core inflation, well below the 4.4 percentage points in October 2022 (but from -0.1 percentage point in March). , mainly due to the impact of the temporary energy price correction in April last year). Food prices, also heavily shocked by the war in Ukraine, were still rising in April but slowing down.

ECB hawks have arguments in favor of a 50bp hike. tomorrow, as well as focus on the maximum deposit rate of 4% or higher. Core inflation eased from 10.6% yoy in October to a still excessive 7.0% in April, but core inflation excluding energy and food accelerated from 5.0% to 5.7% in March and eased slightly to 5.6% in April. Wage inflation looks set to rise from an average of 2.9% per annum in 2022 to 5% this year. Employment data is prompting workers to push for higher wages to offset much of last year’s price increase. Anxiety in the banking system, which stirred the markets before the last meeting of the ECB on March 16, has largely subsided. Eurozone households are not increasing consumption, but they have a lot of excess savings, and this is the risk of rising inflation.

* Mr. Holger Schmieding is an economist at Berenberg Bank.