Affected by destabilising factors such as the protracted conflict in Ukraine and the gas combat with Russia, EU member economies are under heavy pressure by escalating inflation and the target of bringing inflation back to the normal level of 2%, by the ECB is a big challenge.
The above statement of the ECB’s head came in the context of consumer prices in the Eurozone increasing by 10% in November, compared to the same period last year. In the previous October, inflation had risen to a record high of 10.6%, while the ECB's inflation target was only 2%. To combat high inflation, the ECB has raised interest rates several times since last summer.
Most recently, on December 15, the ECB raised interest rates for the fourth time in a row, whereby the base rateincreased by 0.5 percentage points to 2.5%, the highest since 2008. However, this increased rate marked a significant reduction in momentum compared to 0.75 percentage points in the previous two increases, while inflation shows signs of peaking and the risk of recession is looming.
The ECB’s President affirmed that the bank has beenraising interest rates and will continue to increase at a steady rate until it is at a level that warrants a return to the set target. This policy forecast will be maintained in the coming months as consumer prices continue to rise due to high energy costs. Analysts said that although raising interest rates is considered an important tool to control inflation, this policy also puts a burden on the economy because companies and households face more difficulties when they borrow or repay debts.
According to the latest forecast by the ECB, the average annual inflation in the Eurozone is 8.4% in 2022 and will fall to 6.3% in 2023 before falling to 3.4% in 2024. As a leading economy in Europe, Germany has been also struggling to cope with "price storms" and escalating inflation. President of the Deutsche Bundesbank, Joachim Nagel, said that Germany's inflation will not drop sharply until 2024.
Nagel also noted that German inflation will still be at 7% in 2023, as the impact of low-interest rates will take longer to take effect as expected. He forecast that the inflation rate will decrease in December, thanks to the support measures from the German Government for businesses and consumers. The head of the Bundesbank also forecast that German inflation will decrease next year, provided the ECB continues to raise interest rates.
One of the difficulties facing the EU in the fight against inflation is the impact of the US Inflation Reduction Act (IRA) on the economies of the old continent. With the granting of a tax exemption for electric vehicles manufactured in North America, the provision of subsidies for companies and consumers to transition to green technology and protect the environment, and the regulation of imposing a minimum corporate tax rate of 15% for companies with a turnover of more than 1 billion USD per year, the IRA is said to be detrimental to European companies.
The European Union (EU) is concerned that these new trade barriers create unfair competition, which could affect European electric vehicle manufacturers. President of the European Commission Ursula von der Leyen called for action to address concerns related to the IRA and said that the EU needs to act to create a fair playing ground, as well as work with the US to address some of the most worrisome aspects of the IRA. So far, the US and EUhave been working and negotiating towards resolving the EU's concerns about the IRA, but there are still many issues that are difficult to compromise.
After 6 years of applying the zero-interest policy, the ECB initiated a change in interest rate policy to cool down inflation. Although raising interest rates may hinder economic growth, EU countries have been showing their determination to bring inflation back to 2%, even though the road ahead is long and difficult.