The European Central Bank (ECB) hinted in its last meeting on April 30 that it could raise interest rates in June, provided the situation in the energy markets does not improve. However, this decision could have serious consequences for the Eurozone, as the ECB fears that rising energy prices could lead to a recession.
An ECB council member expressed concern about the potential second-round effects that could be triggered by rising energy prices. These could lead to higher wage demands, further fueling inflation. The ECB council faces the challenge of balancing the fight against inflation with the need to support economic growth.
Current economic conditions are tense. The war in Ukraine and its repercussions have severely impacted the business climate and consumer confidence. According to Süddeutsche Zeitung, the decline in the business climate in April already indicates stagnation, which further limits the possibility of excessive wage demands.
The ECB could potentially cause only moderate damage to the economy with a 0.25 percentage point rate hike in June. However, a more aggressive interest rate policy could lead to a recession unless energy prices fall unexpectedly quickly. A decline in economic output would dampen future wage and price increases.
