In a hopeful development for the ECB, processed food, alcohol and tobacco inflation slowed a full percentage point to 14.7%, suggesting that a long-awaited turnaround in food prices may now be happening.
The small core inflation surprise comes as the ECB's quarterly survey of bank lending pointed to an exceptionally large drop in credit demand amid tighter lending criteria, adding to the case for a smaller rate hike. The ECB has raised interest rates by at least 50 basis points at each of its past six meetings. Some policymakers, including French central bank chief Francois Villeroy de Galhau, have made the case for a more measured move this month, arguing that the ECB has already lifted borrowing costs sharply enough to restrict the economy. But others, including board member Isabel Schnabel, have said that a 50 basis point move needs to remain among the options because price growth is proving sticky, raising the risk that it could level off above the ECB's 2% target. Nearly all 26 members of the Governing Council appear to agree that more policy tightening is required after a record 350 basis points of rate increases since July. A key worry is that wage growth is now accelerating above expectations and this will drive up the cost of services, the single largest item in the consumer price basket. Services inflation accelerated to 5.2% from 5.1% but the price growth of non-energy industrial goods, another crucial segments, slowed to 6.2% from 6.6%. Investors see the ECB's 3% deposit rate rising to around 3.75% by the end of the summer although rate expectations have been volatile in recent months, moving in a wide range since the financial market turbulence of March. (Reporting by Balazs Koranyi; Editing by Catherine Evans)
Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net))