​Stagflation looms large in Europe


Euro weakened as ECB's Isabel Schnabel, known for hawkish stance, cited weaker-than-expected euro zone growth.

The euro ebbed on Thursday after ECB rate-setter Isabel Schnabel, one of the most hawkish members at the ECB, said euro zone growth was weaker than predicted.

Overall inflation in the bloc was unchanged at 5.3% in August, defying expectations for a drop to 5.1% as energy costs rose sharply over the month, Eurostat data showed.

Services inflation edged lower to 5.5% from 5.6% this month, while other figures showed unemployment holding at a record-low 6.4% in July.

A sentiment survey by the European Commission released on Wednesday showed worsening for a fourth month in the wake of a slew of weak data.

Policymakers’ concern that ‘the economy might be entering a phase of stagflation’ has caused a quandary as they weigh whether pressures are too persistent to risk a pause in tightening.

Traders are pricing in a 30% chance of another 25bps hike in September while the implied chance of one final ECB increase this year fell to 70%.

The UK is feeling the same pain. After robust wage data in August, Fitch Ratings observed an ‘increasing risk that the UK will experience a period of stagflation — with low growth and rising unemployment coinciding with high inflation.’

Bets on the country’s peak rate have been slashed to around 5.80%, compared to a 6.60% peak in early July. Sterling has slipped from a recent peak of 1.3142 seven weeks ago to around 1.267 against the US dollar.


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