Stubborn core eurozone inflation means more ECB hikes to come - ING

(Alliance News) - An uptick in eurozone core inflation suggests that the European Central Bank still has work to do, analysts at ING commented.

They expect the central bank to enact two more 25 basis point rate hikes before interest rates reach a peak.

The annual harmonised inflation rate across the eurozone was 6.9% in March, slowing from 8.5% in February. The latest figure was lower than the FXStreet-cited consensus of 7.1%.

The core inflation rate - which excludes energy, food, alcohol and tobacco - quickened, however. Coming in at 5.7% in March, it picked up speed from 5.6% in February. The outcome met market consensus.

"Many of us saw this coming. The March decline in inflation was widely expected due to the energy price developments, which spiked in March last year. The base effect is therefore currently very favourable for energy developments," ING analysts added.

"Because it was so widely known that energy inflation would drop like a stone, the bigger concerns remain around the other components. This is where a lot more work needs to be done."

ING noted food inflation now tops the 15% mark, but there may soon be respite in that respect.

"Price pressures remain high for the moment, although this should improve in the coming months. Forward-looking data are starting to become less concerning from an inflation perspective though. Futures prices for energy look manageable, while producer prices for food have also come off peaks," ING added.

"Wage developments" are a concern, however. According to a reading on Friday, the unemployment rate in the single currency area was unchanged at 6.6% last month.

Eurostat's most recent labour cost index data, for the fourth quarter, showed hourly labour costs increased by 5.7% on-year in the eurozone.

"Wage growth has been rising and with unemployment still at a low of 6.6%, the chances of there being upward pressure on wages remain. This could result in somewhat stickier inflation, mainly on the services side. So while March has seen a large drop in inflation, core inflation remains a concern for the ECB. The potential for core inflation to remain stickier than hoped will be the main reason for the ECB to continue to hike in the near term," ING added.

The Dutch bank expects the ECB to lift rates by another 25 basis points in May and June, respectively.

Earlier in March, the central bank raised interest rates by 50 basis points, despite a fragile banking sector.

This took the interest rate on the main refinancing operations, the interest rate on the marginal lending facility, and the deposit facility to 3.50%, 3.75% and 3.00%.

By Eric Cunha, Alliance News news editor

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