As we wrote yesterday, the inflation data in the Eurozone being released throughout the week could adjust the pressure the ECB faces today when it delivers its latest monetary policy decision. Yesterday inflation data for Italy was published showing inflation at a 26-year high at 4.8% year on year. The European sovereign debt crisis did admittedly constrain inflation in Italy over the past decade, however, the near 1% beat versus expectations and December’s reading wrong footed the market yesterday overhauling incumbent inflation expectations.
The main driver of inflation in Italy continues to be energy cost as is the theme across much of Europe and indeed the world. However, there is an increasingly broad base of inflation with notable month on month price increases coming from components including food and services. Core inflation flash readings for January also outpaced inflations amidst robust inflationary pressures within (particularly) Atlantic bordering member states.
The market has already priced in 25 basis points worth of hikes within the ECB’s deposit rate before the end of the year. This pales into insignificance when compared with the monetary action priced in in the United States and those nations further along their normalisation cycles. However, it is still sufficiently developed for the market to reflect their disappointment within the Euro should President Lagarde disappoint markets today.
Having so far stuck to the narrative that inflationary pressures will fade towards the end of the year and that no rate hikes will take place in 2022, there is growing pressure on the ECB to take action on rising inflation. Lagarde is still likely to downplay the severity of inflation placing it as a transitory and predictable by-product of the recovery from the pandemic.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – A different Euro-vision
Charles Porter
Tue 23 May 2023
A different Euro-vision A late start to monetary tightening versus the rest of the world could deliver the some-what illusive stronger Euro to markets. A delay to hike rates in Europe has left the ECB playing catch up, with interest rates lagging noticeably behind their peers. Since its inception over 20 years ago, the Eurozone […]
Morning Brief – European Central Bank
Humphrey Percy
Fri 5 May 2023
European Central Bank Yesterday the ECB duly raised its interest rates by 25bps. President Lagarde maintained that the ECB was on a journey and had not yet arrived-some would, given that ECB inflation is not dropping and is stuck at 6.9%, interpret that analogy as being their firm intention to continue to raise rates given […]
Morning Brief – US Government Default on June 1 without a hike in the Debt Ceiling
Humphrey Percy
Wed 3 May 2023
US Government Default on June 1 without a hike in the Debt Ceiling Markets (so far) are remarkably sanguine about this appalling scenario for the US and therefore the global economy. President Biden and the Republican House Speaker have not discussed this issue since February-and the Speaker is currently in Jerusalem so unable to meet […]
