The European Central Bank may need to raise interest rates further to counter high inflation and prevent it from spiralling into wages, ECB policymakers said on Friday, October 30, hours after the bank left rates unchanged, Reuters reported from Frankfurt. The ECB debated a hike on Thursday but ultimately decided unanimously against it, on the premise that an energy price-driven inflation surge is not yet generating dangerous second-round effects — but Friday's commentary suggested a hike may have only been delayed, with a move in December on the cards.

Source: Reuters

Bank of Italy Governor Fabio Panetta said in Rome that monetary policy 'can and should prevent (price increases) from becoming entrenched in the expectations and behaviour of households and firms, triggering a wage-price spiral that would be costly to stop.' He added: 'With inflation set to remain above target for an extended period and risks skewed to the upside, further increases in the policy rates could prove necessary.' Austria's central bank chief Martin Kocher echoed Panetta's comments, Reuters reported.

Source: Reuters

3.8%euro zone inflation last month, nearly twice the ECB's 2% target, according to Reuters
2-in-3chance investors assign to a December ECB hike, according to LSEG data cited by Reuters
~3further rate increases investors expect in the coming year, on top of two hikes earlier this year
2028earliest return of inflation to target suggested by an ECB survey published Friday

Euro zone inflation hit 3.8% last month and could accelerate further in the coming months on a renewed surge in energy costs and rising food prices, Reuters reported. An ECB survey published on Friday suggests inflation may accelerate this year and next by more than earlier predicted, and may not return to target until 2028. A separate ECB survey of large euro zone companies, also published Friday, showed 40% of firms expecting or seeing the risk of higher wage demands, up from 20% in July — the wage channel Panetta warned about.

Source: Reuters

Why it matters beyond Europe

The debate lands the same day official figures showed the euro zone economy grew 0.4% in the third quarter, beating forecasts of 0.2%, even as borrowing costs surged. For Punjabi and Indian families with relatives, students and businesses in Europe, another ECB hike would mean costlier loans and mortgages at a time when energy and food bills are already rising — and it underlines how the Middle East war's energy shock is still working its way through the world economy.