Berenberg: The European Central Bank Should Not Rush to Raise Interest Rates; Demand Destruction Will Solve Inflation on Its Own

Golden Ten Data, May 22 – Berenberg Chief Economist Schmieding stated that if the European Central Bank attempts to combat inflation by raising interest rates, it would be “a major mistake,” warning that such action could drive Europe into a recession. Schmieding noted that the eurozone's three core economies—Germany, France, and Italy—have already been weakened by the recent surge in energy costs, resulting in a stagflation environment. However, the latest PMI data show that employment and demand drivers are weakening, so demand destruction will “take care of” the inflation problem within stagflation, as consumers will have to cut spending in other areas to cope with higher energy costs, eliminating the need for aggressive tightening policies. Schmieding stated: “The important thing is to distinguish between what central banks are likely to do and what is actually the right thing to do. My sense is that the European Central Bank is on the verge of making a major mistake... If the European Central Bank raises rates in June—and it appears they are determined to do so—that will exacerbate economic difficulties. If rate hikes continue thereafter, in the end it may not be stagflation, but rather a mild recession.”