Unexpected spike in inflation in France and Spain
February 28, 2023 10:23 pmVideo
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Investors increased bets on the European Central Bank’s interest rate peak to 4 percent for the first time after inflation in France and Spain was unexpectedly high.
Consumer prices in France jumped a record 7.2 percent from a year earlier in February due to higher prices for food and services. In Spain, the increase was 6.1%. Analysts estimate that price growth will remain steady at 7% in France and slow down in Spain.
Stronger figures from the eurozone’s second- and fourth-largest economies will solidify the half-point rate hike the ECB plans for March and support officials who say more serious steps are needed to get inflation under control.
Investors are betting on an extended cycle of monetary tightening by the ECB, assessing the risk of cuts this year and betting that the deposit rate will continue to rise in 2024.
Traders increased bets on the so-called terminal rate from 3.5% at the start of the year, which was also helped by worse-than-expected U.S. price data. The ECB deposit rate, currently at 2.5%, has never been higher than 4%.
In this backdrop, the EURUSD pair moved into a long correction:
Chief Economist Philip Lane said in comments to Reuters earlier Tuesday that officials may hold borrowing costs high for some time after they peak.
Ahead of this week’s March meeting, policymakers will scrutinize inflation data from across the continent, currently focusing on stubborn underlying price pressures, even as core numbers for the bloc of 20 countries recede. Eurozone data will be released Thursday, and economists are predicting a pullback to 8.3% from 8.6%.
Tuesday’s data will not only challenge the ECB, but also worry policymakers, even though the French and Spanish figures are still among the lowest in the eurozone.
The biggest price hike in a generation is becoming increasingly difficult for French President Emmanuel Macron, who has already faced massive protests against his plans to overhaul pensions.
While his government spent huge sums to deal with the initial energy price shock last year, problems with public finances have forced him to withdraw some support. At the same time, inflation is spreading to goods and services where government intervention is difficult.
The material has been provided by InstaForex Company – www.instaforex.com
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