EU and UK Struggle with Inflation... End of Tightening Moves Further Away

UK, Wage Increases Pressure Inflation
Tightening Indicated Until 2% Reversal
ECB May Raise Rates After July
Core Inflation Twice Target Level

Despite repeated tightening, core inflationary pressures in the UK and Europe (EU) have not eased, leading to forecasts that the European interest rate hike cycle will continue for the time being. The European Central Bank (ECB), which was expected to halt rate hikes after July this year, is facing divided opinions on ending tightening as some members insist on raising rates through the second half of the year.

◆BOE "Failure to Control Inflation"... Interest Rate Hikes Until Inflation Returns to 2%

Andrew Bailey, Governor of the Bank of England (BOE), expressed concern over the persistent inflationary pressures in the UK at the British Chamber of Commerce annual meeting on the 17th (local time), stating, "We will raise interest rates as much as necessary until the inflation rate returns to the 2% range."

Andrew Bailey, BOE Governor
Photo by Yonhap News

In March, the UK's Consumer Price Index (CPI) recorded 10.1%, exceeding the market expectation of 9.8%. It also rose 0.8% month-on-month, surpassing Wall Street's forecast of 0.5%. The UK is the only Western European country with double-digit inflation. In the UK, inflation continues as economic growth occurs alongside rising food and energy prices, which in turn have driven wage increases.

Governor Bailey stated, "Core inflation has triggered a secondary effect of pushing up wages," and acknowledged that the BOE has failed in its 18-month effort to control core inflation. Goldman Sachs predicts that the BOE will implement an additional 0.5 percentage point rate hike, with the base rate reaching 5.0% by August.

◆ECB: Too Early to Assume Tightening Ends in July... Possibility of Rate Hikes in the Second Half

The situation in Europe, which was thought to be nearing the end of its tightening cycle, is similar. There are forecasts that rates could be raised several more times than the market expects.

Luis de Guindos, Vice President of the ECB, attending a banking conference in Madrid, Spain, said, "Although most of the (rate hike) work has been done, there is still a way to go on the tightening journey."

Luis de Guindos, Vice President of the ECB
Photo by EPA Yonhap News

On the 4th, the ECB took a baby step by raising the base rate by 0.25 percentage points, signaling a pause in rate hikes. With core consumer inflation easing in April and inflationary pressures slowing, the ECB appears to have started adjusting the pace of tightening. Consequently, the market speculated that the ECB would raise rates once more by about 0.25 percentage points in July before ending tightening.

However, Bloomberg reported that within the ECB, some members insist on additional hikes because current inflation is excessively high compared to the target rate of 2%. The EU's core CPI hit a record high of 5.7% in March and slightly declined to 5.6% in April but still remains more than double the ECB's 2% target.

Bloomberg stated, "The market is betting on two more rate hikes," but also noted, "Some ECB members argue that tightening policies should continue beyond summer."

Martins Kazaks, Governor of the Bank of Latvia, also emphasized that the ECB's tightening should not be assumed to stop in July. In an interview with Bloomberg on the 10th, he said, "Additional rate hikes are necessary to tame inflation," adding, "I still think it is unclear (whether tightening will end in July), and there is considerable justification for us to raise rates."

This content was produced with the assistance of AI translation services.