Inflation in Europe has been hit by higher energy prices and supply shortages. Analysts question how far central banks will go to keep inflation in check.
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Inflation in the eurozone fell for a second straight month in December, but analysts don’t expect it to cause a change in tone against inflation. European Central Bank.
Headline inflation, which includes food and energy costs, hit 9.2% year-on-year in December, according to preliminary data Friday from the European statistics agency, Eurostat. It follows November’s headline inflation rate of 10.1%, representing the first slight decline in prices since June 2021.
The eurozone economy has been under immense pressure after Russia invaded Ukraine in February 2022, with energy and food costs skyrocketing last year. In an effort to combat rising prices, the European Central Bank raised interest rates four times in 2022 and said it is likely to do so again this year. The main rate of the bank is currently at 2%.
Despite other signs that inflation is easing, analysts say it is too early to celebrate and do not expect a pivot from the region’s central bank.
Hetal Mehta from Legal & General Investment Management told CNBC’s “Street Signs” on Thursday that interest rates will “go up to 3(%) and may have to stay at that level throughout the year even during a recession.” economy is becoming increasingly clear.
It comes after the ECB President Christine Lagarde issued a particularly belligerent tone in December: “We’re not pivoting, we’re not wavering, we’re showing determination.” She added that the bank has “more facilities to cover.”
The ECB cannot and will not make policy decisions based on volatile energy prices.
Carsten Brzeski
global macro director, ING Germany
Speaking earlier this week, ECB Governing Council member and Bank of France Governor Francois Villeroy de Galhau said interest rates could peak this summer.
The ECB also said in December that it would begin reducing its balance sheet in March at a rate of 15 billion euros ($15.8 billion) per month through the end of the second quarter. This step is also expected to address some of the region’s inflationary pressures.
At that time, The central bank forecasts an average inflation rate of 8.4% for 20226.3% for 2023 and 3.4% for 2024. The bank’s mission is to aim for an overall inflation figure of 2%.
Earlier this week, data from Germany showed inflation falling from 10% in November to 8.6% in December.
Carsten Brzeski, global head of macros at ING Germany, said the numbers were “not a relief, however, just a reminder that eurozone inflation remains largely the same. energy price phenomenon.”
Energy costs have fallen in Europe in recent months. Natural gas prices, for example, traded at around 72.42 euros per megawatt-hour on Friday – much lower than the peak of 349.90 euros per megawatt-hour in August.
Among inflation components, energy continued to be the biggest driver in December, but fell from previous levels. According to the latest figures, energy costs have fallen from 34.9% in November to an estimated 25.7% in December.
“The ECB cannot and will not make policy decisions based on volatile energy prices. Instead, in our view, the central bank will raise interest rates at the next two meetings to a total. plus 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 inflation data “a bit of relief”, “which should make the ECB wary at the start of the year.” .” He expects two 50 basis point rate hikes in the first quarter.
IIn terms of country analysis, the Baltic states once again recorded the highest spike in inflation, at around 20%.
