Eurozone inflation increased slightly to 7% in April

Eurozone inflation rose slightly to 7 per cent in April, complicating the picture for rate-setters at the European Central Bank when they meet on Thursday to set borrowing costs.

The figure for consumer prices was worse than the flat reading — from 6.9 per cent the previous month — that economists polled by Reuters had forecast.

Eurostat, the EU’s statistics agency, said annual core inflation, which strips out energy and food prices to give a better indicator of underlying price pressures, fell to 5.6 per cent in April, from 5.7 per cent the previous month. ECB officials have said they do not expect to stop raising rates until underlying inflation declines significantly.

The month-on-month inflation rate slowed from 0.9 per cent in March to 0.7 per cent in April.

Separately, demand for loans from eurozone businesses has fallen at the fastest rate since the 2008 financial crisis, according to ECB data.

The ECB said banks indicated “a further substantial net tightening in credit standards for loans to firms and for house purchases” in the first quarter as rising borrowing costs and fading confidence weighed on economic activity.

Rate-setters said the results of its quarterly survey of banks, which was carried out in the final week of March and first week of April, could be a decisive input in their discussions on how much to raise rates by at this week’s meeting.

The behaviour of banks is being watched by central bankers because of the recent turmoil in the sector that triggered the collapse of Silicon Valley Bank in the US and pushed Credit Suisse into the arms of its rival UBS in March.

Economists say the tumult — which continued with the seizure of First Republic and sale of the US lender’s assets to JPMorgan Chase on Monday — will intensify the contraction of lending and squeeze demand, reducing the need for the ECB to raise rates.

The ECB said eurozone banks had tightened their credit standards by the most since the eurozone debt crisis erupted in 2011. “The tightening for loans to firms and for house purchase was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics,” it added. Banks expected “a further, though more moderate, tightening of credit standards” in the second quarter.

It said the main drivers for banks’ retreat from lending were “higher perceptions of risk” and “lower risk tolerance”. But the ECB’s unprecedented increase in borrowing costs and its reduction of liquidity in recent months pushed up funding costs for banks and “had a tightening impact on credit standards”.

The ECB has increased its deposit rate from minus 0.5 per cent last summer to 3 per cent in March. Policymakers have said another increase is likely to be announced after its meeting on Thursday but incoming data will determine whether it sticks to a half-percentage point rise or slows to a quarter-point move.

The withdrawal of liquidity from the banking sector is set to accelerate in June when €480bn of ultra-cheap ECB funding to eurozone banks matures and the central bank is expected to accelerate the pace of shrinking its €5tn portfolio of bonds.

“Access to retail and wholesale funding deteriorated in the first quarter,” the ECB said, adding that the recent turmoil in the banking sector may have reversed an improvement in lenders’ access to funding from money markets and bond issues. 

The level of loan applications being rejected by banks increased to its highest level since the ECB started asking the question in 2015, it added.