Euro Sign And European Central Bank In Frankfurt

Although inflation in the Eurozone settled to 6.1 percent in May, its lowest in 14 months, European Central Bank (ECB) president Christine Lagarde said in a public statement that inflation is “still too high” and the central bank must raise its base interest rate even more to rein it back.

The ECB focuses on core inflation, which ignores energy and food prices. The core rate edged down to 5.3 percent last month from 5.6 in April, but remains well above the 2-percent rate the bank has targeted.

“There is no clear evidence that inflation has peaked,” Lagarde told a banking conference in Germany after the new inflation number was announced.

ECB surveys “show that tighter monetary policy is not going to affect people’s holiday plans,” she added, indicating that consumers are still willing to spend.

However, data shows that lending activity has shrunk since Credit Suisse, Switzerland’s second-largest bank and an international financial presence, collapsed in March.

TREND FORECAST:  The ECB began raising its interest rate even later during the current round of inflation than the U.S. did… since they, as with the Fed’s, denied there was inflation, calling it temporary and transitory as it was spiking.

As a result, the ECB is still trying to catch up to inflation with higher interest without raising rates so fast that they will tank the region’s economy. 

Because of its late start, if the ECB is going to err, it will be by keeping rates too high for too long. And considering that Europe’s annual inflation rate is 6.1 percent and the ECB benchmark deposit—which was minus 0.5 percent last July and is now only at 3.25 percent—the real interest rates are deep in negative territory. And as we have forecast, with the world’s fourth-largest economy, Germany, officially in recession and economies weakening, the higher the ECB raises interest rates, the deeper Europe will fall into recession.

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