Eurozone: the ECB warns that the battle against inflation is not yet won

Inflation slowed in May in several eurozone countries, including France, but the battle against high prices is still not won, the vice president of the European Central Bank said on Wednesday.

In France, the aggregate slowed down in May to 5.1% annual and in Spain to 3.2%, according to provisional data. In Italy, the inflation rate also fell to 7.6% but remained above the European average. In Germany, inflation fell in five large Länder in May.

Increasingly visible effects of monetary tightening

Faced with persistently high inflation, the ECB led a sharp rise in interest rates since last July that could “reveal vulnerabilities” in the financial system, the ECB warns in its semi-annual report on financial stability.

This is despite the fact that economic conditions have “improved slightly” and energy prices have recently fallen.

The ECB has raised its benchmark rates to an all-time high of 3.75 percentage points since last July, and observers expect it to raise them further as the priority is to bring inflation back to the 2% target. “Our mandate is price stability,” which is a condition to guarantee financial stability, recalled Luis de Guindos.

However, the effects of this policy of monetary tightening are increasingly visible, in particular a correction in the real estate markets that could “disorder” if the rise in mortgage rates “reduces demand more and more,” says the ECB.

Bank of Japan decisions analyzed

This report also comes after the financial turmoil in March due to bank failures in the United States and the forced acquisition of Credit Suisse by UBS. Banks in the Eurozone, which are considered strong, are seeing their loan volumes shrink and financing costs rise, which may affect their profitability. Signs of deterioration are visible in their loan portfolios exposed to commercial real estate, small business and other consumer credit, according to the report.

If the Bank of Japan were to also abandon its accommodative monetary policy in the face of persistent inflation in this country, this “could influence the decisions of Japanese investors who have a large footprint”, particularly in euro zone bond markets, with the risk significant withdrawals of funds, says the ECB. “Any policy change by the Bank of Japan that must respond to the evolution of inflation will have an impact,” according to Luis de Guindos.