Pressure piles on ECB as major eurozone nations see inflation uptick

(Alliance News) - Red-hot inflation data from the eurozone this week has kept the spotlight firmly on the European Central Bank.

Readings from Spain and France on Tuesday and Germany on Wednesday suggested the path back to 2% inflation in the single currency area will be bumpy.

Germany's yearly inflation rate was unchanged at 8.7% last month, defying expectations of a slowdown and giving the ECB food for thought.

Destatis on Wednesday said Germany's yearly inflation rate was steady at 8.7% in February. It had been expected to cool to 8.5%, according to FXStreet.

The inflation rate is just a hair below the recent peak of 8.8%, seen in both October and November. Consumer prices had fallen back 8.1% yearly in December before growth quickened markedly at the start of 2023.

France's statistics body Insee released preliminary data for consumer prices on Tuesday. In February 2023, consumer prices should increase by 6.2% year-on-year, quickening from growth of 6.0% in January.

Also putting the European Central Bank under the spotlight, figures showed inflation in Spain also intensified in February, suggesting that price pressure is proving stickier than ideal.

According to INE, the yearly inflation rate in Spain quickened to 6.1% in February, from 5.9% in January.

Analysts at Capital Economics commented: "The renewed rise in headline inflation in Germany, France and Spain in February suggests eurozone inflation edged up this month, rather than falling as had been expected. With signs that underlying inflationary pressures also intensified, this will keep the ECB firmly in a hawkish mood."

The ECB's next interest rate decision is on March 16. At its last meeting on February 2, the ECB lifted interest rates in the eurozone by 50 basis points, in line with market expectations, and pencilled in another increase in March.

Thursday's hike takes the interest rate on the main refinancing operations, and the interest rate on the marginal lending facility, and the deposit facility to 3.00%, 3.25% and 2.50%, respectively. They previously stood at 2.50%, 2.75% and 2.00%.

Later in February, President Christine Lagarde reiterated that the institution plans to raise its interest rates by a half percentage point in March, even as the eurozone's economic outlook improves.

"In view of the underlying inflation pressures we intend to raise interest rates by another 50 basis points at our next meeting in March," Lagarde told lawmakers at the European Parliament.

This week's inflation data means Lagarde is unlikely to change her mind. Analysts at ING believe monetary policymakers need to look at more than just the headline data numbers, however.

"Inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value. Government intervention and interference, this year and/or last year, sometimes temporarily, sometimes more permanently, will often blur the picture," analysts at the Dutch bank said.

"In Germany, for example, the Bundesbank estimated that energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year. The energy price cap will come into effect as of 1 March but will be paid retroactively. And there is more. Negative base effects from last year's energy relief package for the summer months should automatically push up headline inflation between June and August."

Away from "statistical noise", ING noted that there are opposing downside and upside pressures to inflation. Helping growth to ebb is falling energy prices amid a warmer winter than feared in Europe.

"On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through," ING added.

"Financial markets, which only a couple of weeks ago were still betting on rate cuts at the turn of the year, have now once again turned around and are expecting the ECB to hike by a total of 150bp over the next few months. Not impossible, but clearly a recipe for more bad macro news in 2024."

By Eric Cunha, Alliance News news editor

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