Belenberg: The European Central Bank should not rush to raise interest rates, and the problem of inflation will be resolved by demand destruction.

Berenberg's chief economist Schmieding said that it would be a "major mistake" for the European Central Bank to try to combat inflation by raising interest rates, warning that this could lead Europe into a recession. Schmieding noted that the three core economies of Europe, Germany, France, and Italy, have been weakened by the recent surge in energy costs, leading to a stagflation environment in Europe. However, the latest PMI data shows that factors such as employment and demand are weakening, therefore the demand destruction will "self-correct" the inflation problem in stagflation. Consumers will have to reduce spending in other areas to cope with higher energy costs, eliminating the need for aggressive austerity policies. Schmieding said, "It is important to distinguish what central banks are likely to do and what the correct course of action actually is. My feeling is that the European Central Bank will make a major mistake... If the ECB raises interest rates in June and it looks like they are determined to do so it will worsen the economic situation. If they continue to raise rates afterwards, it may not lead to stagflation, but rather a mild recession."