All eyes are on the latest inflation figures outside the Eurozone as market participants speculate on what the ECB will do next.
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Latest data from the euro zone on Thursday suggested that inflation needs a while to fall significantly, increasing the prospects for further rate hikes in the region in the coming months.
According to preliminary data published on Thursday, the headline inflation in the block of 20 was 8.5% in February. This means that prices are not falling at the rate recorded in recent months. The headline inflation amounted to as much as 10.6% in October, but in January it reached the revised level of 8.6%.
Analysts polled by the Wall Street Journal had expected a lower inflation rate in February at 8.2%. Food prices rose month by month, offsetting the decline in energy costs.
Aside from a slight decline in headline inflation, the core index – which excludes energy and food costs and is due to this fact less volatile – rose to around 5.6% in February from 5.3% in January. All of this together fuels arguments that the European Central Bank could stick to its hawkish stance for longer.
In recent days, market players have considered this prospect after higher-than-expected February inflation data from France, Germany and Spain.
Euro against the US dollar since the starting of the yr
ECB President Christine Lagarde said on Thursday it will take a while for inflation to come down, according to comments provided by Reuters. The bank goals at a base rate of two%.
The Frankfurt-based institution has indicated that one other hike of fifty basis points is feasible when the central bank adjourns later this month. In comments reported by Reuters, Lagarde said on Thursday that the move remains to be on the table as inflation stays well above goal.
Goldman Sachs analysts said earlier this week they were raising the ECB’s expectations for interest rate hikes and pricing in one other 50 basis point hike in May.
Yields on European bonds have been moving at multi-year highs in recent days, due to fears that the hawkish monetary policy will proceed.
“Too Free for Comfort”
“Eurozone inflation has been on a downward trend since peaking at 10.6% year-on-year in October last yr. Helped by base effects, it looks like it is going to fall significantly this yr. Nonetheless, the process is simply too slow for comfort,” Salomon Fiedler, an economist in Berenberg, said in a note to clients on Thursday.
“In our view, the ECB is virtually guaranteed to deliver on its 50 basis point rate hike plans at its March 16 meeting. It would almost certainly also maintain its strong guidance on further rate hikes later,” he added.
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This view is shared by Capital Economics analysts.
“February’s rise in core inflation will reinforce the belief amongst ECB policymakers that significant rate hikes are needed,” Jack Allen-Reynolds, deputy chief economist of the eurozone, wrote in an email.
“It now seems increasingly likely that rates will rise much more,” he added.