8th Apr 2020

Record high inflation sparks debate about interest rates

Consumer prices in the eurozone countries climbed to four percent in June, reaching twice the rate of the European Central Bank's inflation goal. The surge has instantly sparked off a debate about whether the Frankfurt-based bank should increase interest rates.

Speaking to the European Parliament on Monday (30 June), the EU commissioner in charge of economic and monetary affairs, Joaquin Almunia, expressed "deep concern" over the highest inflation rate seen since 1999.

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  • There will be social consequences, EU commissioner Joaquin Almunia warns (Photo: European Commission)

"There will be economic consequences with higher prices, and of course there will be social consequences," Mr Almunia said.

The European Central Bank - which aims at keeping annual inflation "below, but close" to two percent - is expected to raise interest rates by a quarter point to 4.25 percent this Thursday (3 July).

But French, German and Spanish politicians were fast to urge the ECB to refrain from such a move, worried that it would harm economic growth.

According to the Financial Times, French finance minister Christine Lagarde said she was "not convinced that it is prudent to significantly raise interest rates at this stage".

Her German counterpart, Peer Steinbrück, argues that an interest rate increase could "send the wrong signal" and reinforce the expected downturn in the economic cycle of the euro area.

Meanwhile, the price of oil has also hit its record, with one barrel of 'black gold' currently selling for $143.67. A week ago, it was still below $140 a barrel.

EU commissioner Almunia insisted on Monday (30 June) that it is mainly fundamental imbalance of supply and demand that is driving energy and food prices to record highs.

"There is speculation [in financial markets] - I am not saying there is not, but it is the fundamental elements which have driven up oil prices by six times" in recent years, commissioner Almunia told MEPs.

On the other hand, major oil-exporting countries continue to blame financial market speculation, the weak US currency and geopolitical tensions in the Middle East.

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