Inflation in Europe has been affected by higher energy prices and supply shortages. Analysts question how far central banks will go to bring inflation under control.
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Inflation in the eurozone fell for the second month in a row in December, but analysts do not expect that to trigger a change in tone from the European Central Bank.
Headline inflation, which includes food and energy costs, came in at 9.2% year-on-year in December, according to preliminary data on Friday from the European statistics agency Eurostat. It follows November̵[ads1]7;s headline inflation rate of 10.1%, which represented the first weak price decline since June 2021.
The eurozone economy has come under enormous pressure in the wake of Russia’s invasion of Ukraine in February 2022, with energy and food costs skyrocketing last year. In an effort to combat rising prices, the European Central Bank raised interest rates four times in 2022 and said it was likely to continue to do so this year. The bank’s main interest rate is currently 2%.
Despite further signs that inflation is easing, analysts say it is too early to celebrate and do not expect a pivot from the region’s central bank.
Interest rates will “get to 3(%) and probably have to stay there for the whole year, even as the recession becomes more and more apparent,” Hetal Mehta of Legal & General Investment Management told CNBC’s “Street Signs” on Thursday.
It comes after ECB President Christine Lagarde struck a particularly hawkish tone in December: “We are not swinging, we are not wavering, we are showing determination.” She added that the bank has “more ground to cover.”
Earlier this week, ECB Governing Council member and French central bank governor Francois Villeroy de Galhau said interest rates could peak this summer.
The ECB also said in December that it would start reducing its balance sheet in March at a pace of 15 billion euros ($15.8 billion) per month until the end of the second quarter. This step is also expected to address some of the region’s inflationary pressures.
At the time, the central bank predicted an average inflation of 8.4% for 2022, 6.3% for 2023 and 3.4% for 2024. The bank’s mandate is to work towards an overall inflation figure of 2%.
Earlier this week, data from Germany showed inflation fell from 10% in November to 8.6% in December.
Carsten Brzeski, global head of macro at ING Germany, said these numbers “are not a relief, but still just a reminder that inflation in the eurozone is still mainly an energy price phenomenon.”
Energy costs have fallen in Europe in recent months. Natural gas prices, for example, traded at around 72.42 euros per megawatt hour on Friday – sharply lower than the peak of 349.90 euros per megawatt hour in August.
Among the components of inflation, energy continued to represent the biggest driver in December, but came from earlier levels. Energy costs fell from 34.9% in November to an estimated 25.7% in December, according to the latest figures.
“The ECB cannot and will not base its policy decisions on highly volatile energy prices. Instead, in our view, the central bank will raise interest rates at the next two meetings by a total of 100 basis points,” Brzeski said in a note. .
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, also said in a note this week that he sees “little relief” in inflation data, “which will keep the ECB on guard at the start of the year.” He expects two rate hikes of 50 basis points in the first quarter.
IIn terms of national breakdown, the Baltic nations once again recorded the highest jumps in inflation, at a rate of around 20%.