Inflation in Europe was affected by higher energy prices and provide shortages. Analysts are wondering how far central banks will go to bring inflation under control.
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Eurozone inflation fell for a second consecutive month in December, but analysts don’t expect this to alter the tone of the European Central Bank.
Headline inflation, which incorporates food and energy costs, was 9.2% yoy in December, in line with preliminary data from the European statistics agency Eurostat on Friday. That is as a result of November’s headline inflation rate of 10.1%, which was the primary slight fall in prices since June 2021.
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The eurozone economy got here under tremendous pressure within the aftermath of Russia’s invasion of Ukraine in February 2022, when energy and food costs soared last yr. In an effort to fight rising prices, the European Central Bank raised rates of interest 4 times in 2022 and has said it can likely proceed to achieve this this yr. The bank’s essential rate of interest is currently 2%.
Despite further signs that inflation is coming down, analysts say it is just too early to have a good time and don’t expect a return from the region’s central bank.
Rates of interest “will go as much as 3% and can probably must stay at that level all year long, even as the recession becomes more apparent,” Hetal Mehta of Legal & General Investment Management told CNBC’s “Street Signs Europe” on Thursday.
It comes after ECB President Christine Lagarde struck a very hawkish note in December: “We’re not turning around, we’re not hesitating, we’re showing determination.” She added that the bank had “more room to cover”.
The ECB cannot and won’t base its policy decisions on highly volatile energy prices.
Carsten Brzeski
Global Head of Macro, ING Germany
Speaking earlier this week, ECB Governing Council member and Bank of France governor Francois Villeroy de Galhau said rates of interest could peak this summer.
The ECB also said in December that it could start shrinking its balance sheet in March at a rate of 15 billion euros ($15.8 billion) a month by the tip of the second quarter. The move can be expected to ease a few of the inflationary pressures within the region.
At the moment, the central bank projected a mean inflation rate of 8.4% in 2022, 6.3% in 2023 and three.4% in 2024. The ECB’s task is to strive for a headline inflation of two%.
Earlier this week, data from Germany showed a drop in inflation from 10% in November to eight.6% in December.
Carsten Brzeski, global head of macroeconomics at ING Germany, said these figures “aren’t any relief, only a reminder that inflation within the euro area continues to be mainly an energy price phenomenon.”
Energy costs have fallen in Europe in recent months. For instance, natural gas prices were around €72.42 per megawatt hour on Friday – well below their peak of €349.90 per megawatt hour in August.
Of the components of inflation, energy continued to be the most important driver in December, but declined from previous levels. In keeping with the most recent data, energy costs fell from 34.9% in November to around 25.7% in December.
“The ECB cannot and won’t base its policy decisions on highly volatile energy prices. As a substitute, in our view, the central bank will raise rates of interest at two consecutive meetings by a complete of 100 basis points,” Brzeski said in a note.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, also said in a note this week that he sees “little relief” in inflation figures “that can keep the ECB on alert at first of the yr.” He expects two rate hikes of fifty basis points in the primary quarter.
ANDIn national terms, the Baltic countries once more recorded the very best spikes in inflation, which amounted to around 20%.
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