Berenberg Warns Against ECB Rate Hike in June, Says Demand Destruction Will Solve Inflation

According to Jin10, Berenberg's chief economist Schmeding warned on May 22 that the European Central Bank's attempt to combat inflation through rate hikes would be "a major mistake" that risks pushing Europe into recession. Schmeding noted that Germany, France, and Italy have been weakened by recent energy cost surges, creating stagflation conditions. However, latest PMI data shows employment and demand-driven factors are weakening; demand destruction will "naturally resolve" the inflation component of stagflation as consumers reduce spending in other areas to cope with higher energy costs, making aggressive tightening unnecessary.

Schmeding stated: "If the ECB hikes in June—and it appears they will—that will exacerbate economic hardship. If they continue tightening afterward, the outcome may not be stagflation but mild recession."