Eurozone inflation rose to 9.1 percent year-over-year in August, a new record and more than economists were predicting. In response, the European Central Bank (ECB) is now expected to raise interest rates substantially, most likely by 0.75 percentage points, with expectations of such a move leading the euro to strength against the dollar. On Wednesday evening, the European currency gained about half a percent to hover above $1.0060.
The European statistical office Eurostat announced on Wednesday that the year-over-year growth rate of consumer prices in the euro area accelerated to 9.1 percent in August from 8.9 percent in July. With inflation soaring to a record high, it is now well above the ECB’s 2 percent target.
Last month, in response to the sharp rise in inflation, the ECB raised its interest rates for the first time since 2011, more significantly than it had initially announced. Its base rate rose to 0.50 percent from a record low of zero percent, which it had held since 2016.
The ECB is expected to raise the base rate by at least another half-percentage point at its September meeting. However, expectations are growing that the scope of the September interest rate increase in the eurozone will amount to 0.75 percentage points, although Bloomberg notes that this may not be a sufficient reason for such a significant increase.
While the Russian invasion is behind the surge in energy prices, Dutch central bank chief Klaas Knot noted on Tuesday that strong consumer demand has also boosted prices. Increasing wages and a weak euro pose pro-inflationary risks, he warned, urging a quick normalization of monetary policy.
“The Bank Council must act decisively in the fight against inflation at its next meeting,” said Bundesbank head Joachim Nagel.
“We need a strong rise in interest rates in September. Further steps in interest rates can be expected in the coming months,” he said.