Eurozone Inflation Forecasts Raise Optimism, But The ECB Remains Hawkish
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In Europe, the reporting week will start on Monday with the first estimates of German GDP for the last quarter. The latest national inflation statistics will be released on Tuesday, along with the eurozone-wide Q4 GDP printout. Monthly inflation data for the euro zone will be published on Wednesday. Of course, the main event will be Thursday's decision of the European Central Bank.
Intrest rate
The ECB, which has acted as the region's central bank since 1991, has historically been more dovish after years of dying inflation. But the energy crisis, severe supply chain issues and other bottlenecks have pushed prices up across the bloc and led to a new tone from the central bank.
The ECB entered tightening mode last year with four interest rate hikes in an attempt to control high inflation in the eurozone. These decisions raised the main deposit rate from -0.5% to 2%.
The warmer-than-usual weather has been a real blessing for the eurozone economy, and therefore for the euro itself, as it eased some of the fears of an energy-driven recession while helping to ease inflationary pressures.
Despite all this, many ECB officials spoke of a great game.
With inflation still "too high," as President Christine Lagarde said, the ECB will almost certainly raise the deposit rate by half a point next week to continue the most aggressive monetary tightening in its history.
European Central Bank President Christine Lagarde has repeatedly used the phrase "stay the course" when referring to upcoming interest rate decisions, but some market watchers doubt the bank will maintain its hawkish stance for much longer.
Hawkish officials emphasize that the so-called core measure showing underlying price pressures remains stubbornly elevated too.
Markets have priced in a 50bps hike for the next two policy meetings, but there are questions as to whether the ECB will need to ease its hawkish stance afterwards.
A Reuters poll released earlier this week showed markets expect the ECB to hold off on interest rate hikes in the second quarter when the deposit rate hits 3.25%.
Looking at the region, economists predict that inflation in Germany and France has accelerated, while in Italy and Spain it will slow down.
CPI
In line with key data forecasts ahead of next week's interest rate decision, eurozone inflation is likely to have slowed slightly after the economy stalled or even contracted.
The main growth rate of consumer prices fell for the third month in January to 9.1%.
The return to single-digit levels surprised many and fueled the wave of optimism even more, even as core inflation, which excludes volatile energy and food prices, remains stubbornly elevated.
Source: investing.com
The data will inform policy makers at the European Central Bank, whose first meeting of 2023 will take place on Thursday, a day after the US Federal Reserve will do the same.
Euro-zone officials normally use forecasts of future inflation and growth to guide their rate hiking. But several have also hinged recent decisions on the latest monthly outcomes for consumer prices, bringing greater significance to such releases.
Positive news from the eurozone
The flash reading of the Eurozone Purchasing Managers' Index, which tracks activity in the manufacturing and services sectors, rose to 50.2 in January from 49.3 in December, marking the first increase since June. A reading above 50 indicates an increase.
The sudden shift in sentiment across the bloc is attributed to a series of positive developments that materialized around the turn of the year. The most important of them: the steady decline in gas prices.
Falling energy prices and easing tensions in the supply chain helped support a return to moderate growth, helping to cushion rising production costs for manufacturers.
An exceptionally warm start to the year, coupled with massive underground storage to meet additional demand and consistent shipments of liquefied natural gas (LNG) to European shores, appears to have instilled a degree of confidence in a previously explosive market.
Source: investing.com
