Surging inflation threatens eurozone 'meltdown'

Analysts have warned that the eurozone currency bloc is at risk of a financial meltdown amid surging inflation and aggressive interest rate hikes.

The yearly inflation rate in the 19-country single currency area reached 10 percent last week, its highest level since records began, according to the European Union's statistics agency, Eurostat.

Prices grew from August's 9.1 percent, exceeding forecasts of 9.7 percent on the back of soaring energy and food prices.

The European Central Bank, or ECB, will be urged to maintain its current policy of rate hikes in an effort to force prices down, despite the risk of triggering economic recession in Europe, reported the Agence France-Presse, or AFP, news service.

Finance experts cited by the Daily Telegraph newspaper predicted that the ECB could have no choice. Antoine Bouvet, rates strategist at financial services company ING, warned that the Bank of England's move to buy up gilt bonds last week, to stabilize the United Kingdom's financial system, "sends an ominous sign also to the ECB".

Christopher Dembik, head of macroeconomic research at Saxo Bank, warned "tension is increasing in global credit markets, especially in the eurozone".

"We are now in a situation where the markets could easily break. We cannot exclude that other central banks will step in, following the examples of the Bank of England, if financial conditions continue to deteriorate," he said.

Inflation, driven by volatile energy and food prices, is at risk of becoming ingrained, reported Euronews.

It said policymakers will push for another 75 basis point rate hike on Oct 27, which is the date for the next ECB rate meeting. After a combined 125 basis points of moves in the last two previous meetings, this would be the ECB's fastest pace of policy tightening on record.

"The September reading for inflation is ugly across the board with all broad categories experiencing accelerating inflation," ING economist Bert Colijn told Euronews. "This seals the deal on another 75 basis point hike from the ECB in October."

Last week, the EU's financial risk watchdog warned of a "perfect storm" that could challenge financial stability. The European Systemic Risk Board said businesses and households yet to recover from the pandemic now face an additional hit.

Ken Wattret, head of economics at S&P Global Market Intelligence, said that headline inflation in double digits and an increasingly alarming surge in core rates leave the ECB "no option other than to continue to jack up policy rates despite the dire economic outlook".

"The ECB cannot afford to disappoint," he said.