State Street Global Markets: Challenging optics for the ECB

State Street Global Markets: Challenging optics for the ECB

March 2, 2023

Eurozone ECB
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Tim Graf, Head of Macro Strategy EMEA at State Street Global Markets, comments on the Eurzone's inflation rate.

'After the strong upside surprises to the French, Spanish and German data earlier this week, with monthly inflation rates beating forecasts by at least 0.2%mom in each, the surprise factor for a big number in the Eurozone-wide figures was dampened. Terminal rate pricing for the ECB had already risen 15bps since Monday reflecting this.

Nevertheless, these are challenging optics for the ECB. Most forecasters assumed Eurozone inflation would start to normalise soon and that base effects would do the heavy lifting in lowering headline and core annual inflation. However, this week’s numbers complicate the situation significantly.

Core inflation rising to yet another new record high will really trouble the ECB. Core inflation is always strong in February and March, as the January sales discounting reverses. However, most of that reversal comes in March. Core CPI rose 0.8%mom in February, which is the biggest rise in February on record. A 50bps hike in March is now a done deal and the May ECB meeting now prices for 40bps of ECB hikes.

We would expect the messaging from the ECB to confirm to not only confirm that, but hint strongly at a further 50bps hike in May, in much the same way that they effectively pre-committed to 50bps in March.'

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