LUXEMBOURGSep 22 – Euro zone inflation is set to rise and price growth is likely to be more persistent than previously thought, Isabel Schnabel, a member of the European Central Bank Council, said on Thursday, defending plans for the entity to continue raising interest rates.
The ECB has raised interest rates by 125 basis points in its last two meetings to combat inflation approaching 10%, and markets have priced in further hikes at each of its meetings. ECB to the next boreal spring.
“There are reasons to believe that inflation may even go up a bit more in the short term,” Schnabel said in Luxembourg.
“Inflation may be more persistent than we initially thought,” he said, adding that price growth has broadened.
Another cause for concern is that long-term expectations have started to rise, and this could be an early warning for the ECB that households and businesses are losing confidence in the bank’s willingness to return price growth to its 2% target.
As inflation rises, economic growth suffers, and Schnabel said the risk of a recession is rising.
Although that would normally mean an increase in the unemployment rate, Schnabel said companies are struggling against labor shortages, so they might retain workers because rehiring them later could be more expensive.