Euro zone inflation hits new record, piling pressure on the ECB
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Christine Lagarde, President of European Central Bank (ECB), gestures during a press conference about the outcomes of the meeting. The event was held in Frankfurt, Germany on March 12, 2020.
Kai Pfaffenbach | Reuters
The euro zone inflation surprised the markets on Wednesday. It surpassed all expectations and put more pressure on European Central Bank (ECB) to take action.
Although expectations were for a drop of 4.4%, January’s cost-of-living for 16 euro currencies holder nations was 5.1%. The December figure was 5.0%.
The euroThe session was a success. dollarBy Wednesday morning U.K. Time, the exchange rate was 1.1309
This week the ECB’s Governing Council meets with an announcement expected on Thursday afternoon. This week, the euro area’s central bank will focus on inflation and geopolitical risk.
A key question to be answered is “How independent can monetary policies be established in the region at a moment when U.S. Federal Reserve banks have been entering a tightening cycle.”
Holger Schmieding (chief economist at Berenberg Bank), stated that inflation continues to be a surprise and the U.S. Fed appears set to increase rates six times this year. He made the statement in a research paper.
“Against this backdrop, it is likely that the European Central Bank’s debate will become more contentious than before.”
Markets will keep an eye on Thursday to see if Christine Lagarde (ECB President) will change her statements about a 2022 rate hike being “very unlikely”. Or whether the ECB will adjust its assessment of the “transient nature” of this current inflation spike.
Russia-Ukraine
A high-profile item on the agenda is the tensions between Russia & Ukraine. This includes any possible consequences.
Anatoli Annekov, Societe Generale’s ECB monitor, stated that if tensions escalate, resulting from disruptions in Europe’s energy supply, the ECB would turn more dovish and focus on the effect of growth, financial stability, and the long-term impact, despite higher energy prices in the near term.”
More generally, it seems that the ECB accepts the fact there is significant uncertainty around the inflation outlook.
“In December, there were 17 instances of the word “uncertainty” [ECB]A press conference was held in December, an increase from zero in October. In addition, the December accounts mention ‘exceptionally high uncertainties’ about inflation,” Mark Wall (chief economist, Deutsche Bank) said in a note.
It is often about the small details of language and semantics, as it is in central banks’ communications with the markets.
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