Eurozone Inflation Sets the Stage for Another Big Rate Increase

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Wednesday’s eurozone inflation data, showing that consumer prices rose 9.1 percent in August compared to a year ago, will maintain the pressure on the European Central Bank to impose another large interest rate increase when it meets next week.

In late July, policymakers at the bank raised rates for the first time in more than a decade, approving a larger-than-telegraphed increase of half a percentage point, saying that inflation was likely to remain “undesirably high” for some time. The move ended the eight-year era of negative interest rates.

Last weekend, Isabel Schnabel, an executive board member of the central bank, said that for the first time in four decades central bankers needed to prove how determined they were to ensure price stability.

Speaking at the Federal Reserve Bank of Kansas City’s annual conference near Jackson, Wyo., Ms. Schnabel suggested that policymakers needed to respond forcefully to the current surge in inflation, even at the risk of lower economic growth and higher unemployment.

Joachim Nagel, the president of Germany’s central bank, argued a similar point in a speech on Tuesday. He said the E.C.B. needed to act boldly when inflation remains high and said it wasn’t currently possible to foresee how high interest rates will go.

Madis Muller, the head of the Estonian central bank, where inflation is the highest in the eurozone at 25.2 percent, said policymakers should consider raising interest rates by three-quarters of a point at the meeting next week.

But the profound uncertainty facing the region means policymakers are split on the best path forward. With the growing risk of recession in Europe, particularly if there is energy rationing, some policymakers have urged for more measured increases in interest rates, arguing that an economic slowdown will also reduce inflationary pressures, and the central bank won’t need to act as aggressively.

The central bank might be able to look through inflation that is being imported into the bloc through higher energy prices, but it will want to prevent domestically-generated inflation from becoming entrenched, said Salomon Fiedler of Berenberg Bank. He expects policymakers to announce a half-point increase in rates on Sept. 8, though there is a “good chance” that the increase is larger.

“If the E.C.B. raises rates more quickly now, it may ultimately get away with a lower level of interest rates over the medium term,” he wrote in a note to clients.