New data out of the euro zone on March 2, 2023 suggested that inflation is taking a while to come down significantly, raising prospects of further rate hikes in the region in the coming months.
Headline inflation across the 20-member bloc came in at 8.5 percent in February, according to preliminary data released on March 2, 2023. This indicates that prices are not coming down at the pace that had been registered in recent months. Headline inflation stood as high as 10.6 percent in October, but reached a revised 8.6 percent in January
Analysts polled by the Wall Street Journal were expecting a lower February inflation rate of 8.2 percent. Food prices increased month-on-month, offsetting declines in energy costs. On top of a small drop in headline inflation, the core figure — which strips out energy and food costs, and is therefore less volatile — picked up to an estimated 5.6 percent in February, from 5.3 percent in January. All combined, this fuels arguments that the European Central Bank could keep its hawkish stance for longer. In recent days, market players have been considering this prospect following hotter-than-expected February inflation figures from France, Germany and Spain. ECB President Christine Lagarde said on March 2, 2023 that bringing down inflation will still take time, according to comments reported by Reuters. The bank targets a headline rate of 2 percent.
The Frankfurt-based institution has indicated that another 50 basis point hike is on the cards for when the central bank adjourns later this month. In comments reported by Reuters, Lagarde said that this move is still on that table, as inflation remains well above target. Analysts at Goldman Sachs said earlier this week that they were raising rate hike expectations for the ECB and pricing in another 50 basis points hike in May. European bond yields have been moving at multi-year highs in recent days, amid considerations that the hawkish monetary policy is here to stay.
“Euro zone inflation has trended down since its 10.6 percent year on year peak last October. Helped by base effects, it looks set to decline substantially further this year. However, the process is too slow for comfort,” Salomon Fiedler, economist at Berenberg, said in a note to clients. “The ECB is virtually guaranteed to follow through with its plans for a 50 basis point rate hike at its 16 March meeting, in our view. It will most likely also maintain strong guidance towards further rate hikes thereafter,” he added.
Source: IBP