Economist sees new data as “alarm signal”
Thomas Gitzel, chief economist at VP Bank, sees the new inflation figures from the monetary union as an “alarm signal”. The economist at the Swiss asset manager Pictet, Frederik Ducrozet, assumes that they are in favor of a tougher monetary policy. “Until there are early signs that underlying inflation is peaking, the ECB is unlikely to slow the pace of monetary tightening,” he says.
Ducrozet now sees an increasing likelihood of another rate hike of half a percentage point in May. The central bank has already clearly signaled a step of this magnitude for its next meeting in mid-March.
Overall consumer prices in the euro zone rose by 8.5 percent in February compared to the previous year. In January, the inflation rate was 8.6 percent. Economists surveyed by the Reuters news agency had previously assumed a significantly lower rate of 8.2 percent. The drivers of inflation are less and less energy prices. In February they rose by 13.7 percent compared to the previous year – in October the increase was still 41.5 percent.
On the other hand, other prices will increase more. According to the minutes of the ECB meeting in early February, which were published on Thursday, the importance of high core inflation for monetary policy was discussed intensively at the meeting. In January, this was already higher than expected in the euro area.
Inflation is also particularly driven by food.
(Photo: IMAGO/Martin Wagner)
Central bankers pay close attention to core inflation because it is considered a good indicator of the medium-term price trend. The central bankers nevertheless stressed at the meeting that inflation was “way too high”, although some voiced the view that too much focus on core inflation was not justified.
An important reason for the rising core inflation are so-called second-round effects, i.e. price increases as a reaction to past cost increases, mainly due to more expensive energy. Many industries are affected by this. For example, hotels and restaurants have to spend significantly more on electricity and gas and pass these higher costs on to customers.
Commerzbank economist Christoph Weil expects core inflation to peak in July and “will only decline slowly thereafter”. He assumes that the companies have meanwhile largely passed on the higher energy prices to the consumers. “But now a new wave of inflation is imminent with the strong rise in wages.” This would drive up the prices for services in particular. The price increase for services also reached a record high of 4.8 percent in February.
Trade unions are increasingly pushing for higher wages, citing the higher cost of living. In Germany, for example, the Verdi services union is calling for a wage increase of at least 10.5 percent in the current wage round.
Lagarde hints at further steps
ECB chief economist Philip Lane expects wages to become “the primary driver of inflation over the next few years”. High core inflation is therefore the most important argument for tighter monetary policy.
Bundesbank President Joachim Nagel is one of the most prominent advocates of a tougher course. On Wednesday, before the inflation figures in Germany and the euro area were announced, he said that inflation was “stubborn” and that it had to be fought “robustly and persistently”. He also expects further “significant” interest rate hikes beyond March.
ECB President Christine Lagarde also indicated on Spanish television on Thursday that further steps could follow. “At this point, it’s possible that we can continue down this path,” she said. “What is very certain is that we will do everything that is necessary to bring inflation back to two percent.” Lagarde had also signaled this determination at the most recent press conferences.
Investors have recently adjusted their expectations for interest rate developments in the euro area. They now assume that interest rates will remain at a high level for longer and expect more rate hikes. This was partly due to statements by ECB representatives.
Governing Board member Isabel Schnabel has warned that inflation in the euro area could prove to be more stubborn than the markets are currently pricing in. In addition, the economy reacts more slowly than before to interest rate increases. The ECB “may have to act more vigorously”.
The interest rate on deposits on the financial markets is currently 2.5 percent. At the beginning of February, a rate of 3.5 percent was priced in on the futures markets for the end of the year. It is now over 3.75 percent.
Several banks have also recently raised their forecasts for the peak in interest rates. The US bank Goldman Sachs sees this now at 3.75 percent, after previously expecting 3.5 percent. She now assumes that the ECB will raise interest rates again by half a percentage point in May.
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