By Chrysostomos Tsoufis

Next Thursday, June 15, the ECB is meeting to decide whether to proceed with the 8th rate hike since last July. A decision not self-evident for many, which becomes even more difficult after its announcements Eurostat on the growth rate of the Eurozone.

The figures show that an increase in the cost of money has begun to “show its teeth”. THE Eurozone went into a technical recession, which means two consecutive negative quarters, which rings a bell of danger of a “cooling” of economic activity. A country that is always at the top, Ireland, led the way, with the economy slowing by 4.1% on a quarterly basis.

THE consumption of households in the Eurozone decreased by 0.3% and investments decreased by 0.6% which are both factors that largely led to the technical recession.

Just a few days ago, the IMF warned in a report that if borrowing costs continued to rise or remained at a high level for longer, demand and property prices would weaken further, threatening the entire market. The average mortgage interest rate more than doubled in 2022 to 6.8% in developed economies. Luxembourg, Norway, Sweden, the Netherlands and Denmark are the countries facing immediate danger.

The bond market is also in turmoil. In an environment of increase of interest rates, bond yields also rise, which means greater difficulties for countries to raise the money they need from the markets. And when interest rate hikes come out of nowhere, as happened with the decisions taken by the central banks of Canada and Australia during the week, then the market “panics” because, as many analysts have noted since yesterday morning, everything shows that we are very far away from saying that inflation has been tamed. So interest rates will continue to rise.

If all of the above are in the balance of the suspension of interest rate increases, the evolution of inflation is in the other. Inflation may have eased but remains more than three times the 2% target. THE inflation although it is declining, it is consistently double-digit and structural inflation – i.e. without energy and food – which has the greatest weight, seems almost “unheard of”.

Ahead of Eurostat’s announcements, the market had definitely discounted a 25 basis point hike next week and another flat rate in the fall. Some argue that the pause should take place from June 15 before the damage to the real economy becomes even greater.