Rate hike dilemma as stagflation shadow looms over the Eurozone

⑴ KBRA Senior Director Ken Egan stated that if the European Central Bank raises interest rates further, there is a risk of unnecessarily pushing the eurozone economy into stagflation. ⑵ Egan pointed out that while credibility is important and appropriate tightening to anchor expectations may be reasonable, interest rates are a blunt tool when faced with supply shocks, especially when growth momentum is weak. ⑶ He noted that the recent spike in eurozone inflation has been driven more by external energy prices rather than internal economic overheating, and that confidence remains fragile. The risk is that if energy shocks are compounded by excessive policy correction, it could lead to stagflation. ⑷ The market expects the European Central Bank to raise interest rates by 25 basis points this week.