All eyes are on the latest inflation figures from the euro zone as market participants ponder what the ECB will do next.
Bloomberg | Bloomberg | Getty Images
New euro-zone data on Thursday suggests it will take some time for inflation to ease significantly, raising prospects for more rate hikes in the region in the coming months.
Headline inflation across the 20-member bloc was 8.5% in February, according to preliminary data released on Thursday. This suggests that prices are not falling at the pace that has been registered in recent months. Headline inflation was 10.6% in October but reached a revised 8.6% in January.
Analysts polled by the Wall Street Journal were expecting a lower inflation rate of 8.2% in February. Grocery prices rose month-on-month, offsetting the decline in energy costs.
In addition to a small decline in headline inflation, the core figure – which excludes energy and food costs and is therefore less volatile – rose to an estimated 5.6% in February from 5.3% in January. All in all, this feeds arguments that the European Central Bank could keep its hawkish stance longer.
Market participants have been eyeing the prospect for the past few days after unexpectedly hot February inflation numbers from France, Germany and Spain.
Stock Chart IconStock Chart Icon
Euro versus US Dollar since the beginning of the year
ECB President Christine Lagarde said Thursday that bringing inflation down would take time, according to comments reported by Reuters. The bank is aiming for a base rate of 2%.
The Frankfurt-based body has hinted that another 50 basis point hike is on the cards if the central bank adjourns later this month. In comments from Reuters on Thursday, Lagarde said that move is still on the table as inflation is well above target.
Analysts at Goldman Sachs said earlier this week that they are upgrading rate hike expectations for the ECB, pricing in another 50 basis point hike in May.
European bond yields have been hovering around multi-year highs over the past few days amid concerns that monetary tightening is here to stay.
“Too slow for comfort”
“Inflation in the euro zone has trended downwards since peaking at 10.6% for the year last October. Supported by base effects, it is likely to fall significantly further this year. However, the process is too slow to be comfortable,” Salomon Fiedler, an economist at Berenberg, said in a note to customers Thursday.
“In our view, the ECB is virtually guaranteed to implement its plans for a 50 basis point rate hike at its March 16 meeting. It will also most likely maintain a strong forecast for further rate hikes thereafter,” he added.
Analysts from Capital Economics shared this view.
“February’s rise in core inflation will bolster ECB policymakers’ belief that significant rate hikes are needed,” Jack Allen-Reynolds, deputy chief economist for the eurozone, said in an email.
“It now looks increasingly likely that interest rates will continue to rise,” he added.
Comments are closed.