Rate Hike Speculations Heighten as Eurozone’s Inflation Accelerates Further

The latest ECB bulletin, European Commission’s latest inflation projections and the preliminary inflation data for October rekindled ECB’s rate hike speculations.

At the ECB bulletin, policymakers acknowledged that strong inflation proves more persistent than previously anticipated. Yet, they expected that it would fade next year. As noted in the report, the present inflationary pressure has been driven by “increasing food and energy inflation”. This reflected the low base effect last year. Most of these pressures should be “of a temporary nature”, The ECB attributed the appreciation of inflation to three main factor: 1. Surging energy prices, 2. demand improvement outpacing supply as global economies reopen, and 3. base effects related to the end of the VAT cut in Germany are still contributing to higher inflation.

The ECB maintained that strong inflation is of transitory nature. Chief economic Lane, at an interview earlier this week, admitted that “inflation is lasting longer than originally expected”. He added that European Commission forecasts that inflation would reach +2.4% this year, before moderating to +2.2% in 2022 and then to +1.4% in 2023. These are significantly higher than ECB’s September projections of +2.2%, +1.7% and +1.5% for the three years to 2023.

Preliminary data from Eurostat revealed that headline inflation of the bloc accelerated to +4.1% y/y in October. This marks the highest level since July 2008, beating both consensus of +3.7% and September’s +3.4%. The energy component to the inflation data jumped +23% y/y.

In November, ECB tamed market expectations of a rate hike by end-2022. President Christine Lagarde suggested that the ECB’s analysis “certainly does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor anytime soon thereafter”. She affirmed confidence that the central bank’s “anticipation and our analysis is actually correct”. Yet, strong preliminary inflation data for October, European Commission’s inflation forecasts and acknowledgement of the persistence of strong inflation at the latest bulletin have rekindled rate hike hopes.