With Core Inflation Slowing and Credit Crunch... Is the ECB Taking a 'Baby Step' Too?

Eurozone Core Inflation Slows for First Time in 10 Months
Banks Also Cut Back on Loans
Attention on April 4 Monetary Policy Meeting

The core inflation rate in the Eurozone, which had been hitting record highs day after day, has slowed down for the first time in 10 months. Unlike the United States, where a big step (a 0.5 percentage point increase in the benchmark interest rate) was expected at the upcoming monetary policy meeting scheduled for the 4th, there is growing speculation that the European Central Bank (ECB) may only raise rates by 0.25 percentage points.

[Image source=Yonhap News]

Eurostat, the statistical office of the European Union (EU), announced on the 2nd (local time) that consumer prices in the Eurozone rose by 7.0% year-on-year in April. The increase was larger than in March (6.9%), breaking the five-month streak of slowing inflation. This figure also exceeded experts' expectations (6.9%).

However, the core inflation rate, which shows the long-term trend of prices, declined. The core inflation rate in April was 5.6%, down 0.1 percentage points from the previous month (5.7%), which was a record high. This marks the first decline in Eurozone core inflation in 10 months. Since core inflation excludes volatile items such as energy and food, it is an indicator that reflects the underlying trend of prices. This slowdown in the inflation rate after 10 months is interpreted as a sign that Eurozone inflation is beginning to ease.

This data was released two days before the ECB's monetary policy meeting on the 4th. Until now, the market consensus was that the ECB would raise the benchmark interest rate by 0.5 percentage points, but with confirmation that inflationary pressures are easing, opinions are divided on the size of the upcoming rate hike.

The banking sector crisis, which began with the collapse of Silicon Valley Bank (SVB) in March, is increasingly supporting expectations of a baby step (a 0.25 percentage point rate hike) by the ECB.

According to the ECB's bank lending survey for the first quarter of this year, released on the same day, the proportion of banks tightening corporate lending rose sharply to 27.0%, compared to 6.0% a year ago. This is analyzed as a result of the sharp increase in borrowing costs and turmoil in the banking sector caused by the SVB incident, leading to tighter lending. The net decrease in corporate loan demand also fell short of banks' expectations and reached the highest level since the 2008 global financial crisis.

Bloomberg forecasted that following the trend of reduced bank lending and the recent confirmation of a slowdown in core inflation growth last month, the argument for the ECB to raise the benchmark interest rate by 0.5 percentage points may weaken. Jamie Rush, Bloomberg's chief European economist, said, "The key takeaway from the April inflation statistics is that there is no significant reversal in the upward trend," adding, "A combination of steady but not outstanding GDP growth, credit tightening, and a moderate decline in core inflation suggests that the ECB is more likely to raise rates by 0.25 percentage points rather than a large increase."

David Powell, Bloomberg's senior economist, analyzed, "The ECB bank lending survey results show that both credit supply and demand are drying up," and added, "This will be helpful for ECB officials who want to slow the pace of tightening from 0.5 percentage points to 0.25 percentage points."