At the opening of today’s trading, the EUR/USD currency pair recovered after being subjected to selling operations with losses that impacted the support level 1.0942. As inflation data in the euro zone showed momentum for future tighter policies, the currency pair tested the psychological barrier level of 1.1000 to halt further drop.
Eurostat reported that for the first time since September, European inflation increased in April, but a highly monitored core inflation measure decreased, which may or may not have consequences for ECB monetary policy ahead of Thursday’s interest rate decision. After six consecutive months without an increase in the general measure of inflation, the government reported that inflation rose from 6.9% to 7% last month, in line with the consensus of economists, as the impact of increases in the cost of non-energy industrial goods was reinforced by sharp increases in the price of food, alcohol, and tobacco.
Even while inflation has been trending downward since September 2022, the higher tick mark has been driven by changes in volatile commodities and controlled pricing components, making it difficult to predict the effects of the European Central Bank’s interest rate decision on Thursday. As the value of things rises, inflation becomes more apparent. The rate of core inflation (inflation measured excluding the volatile components of energy, food, and controlled prices) decreased from 5.7% to 5.6% in February.
This was in line with what experts had predicted, and it may be enough to prevent the European Central Bank from rising interest rates this Thursday by another half a percentage point. The ECB first started hiking borrowing prices in July of last year. Economists agree that the European Central Bank will likely take a less aggressive tack on Thursday by reversing the previous month’s decision to raise interest rates charged or paid on deposits or loans made by commercial banks by a quarter of a percentage point. one to 3.25%.
To guarantee inflation returns to its same objective of 2%, the ECB has increased borrowing costs for banks, enterprises, and families by a total of 375 basis points, or 3.75%. Below are views by analysts and economists in Europe and internationally showing how they envision ECB policy developing as the year progresses, albeit the ultimate decision and prognosis on interest rates remains unknown.
According to the analysts at Nordea Markets, “service price inflation has increased marginally while commodity price inflation has eased, giving somewhat more worrying tendency for core inflation since service prices are where the wage component is largest.” Not only that, but “Also, although unprocessed food price inflation has declined, overall food price inflation has remained very high.”
“Inflation remains very high,” they said, “and while the underlying effects from last year’s energy price increases will drive down core inflation in the coming months, core inflation remains a major concern in the ECB’s economic outlook.” Although the economic outlook is gloomy, core inflation remains quite high and will keep the ECB in raising gear for the time being,” they continued. On Thursday, hawkish statements will likely lead to a +25bps increase.
An analysis by ING Bank concluded, “This makes April inflation in the eurozone sticky and confirms the need for more price increases, albeit at a slower pace and smaller volume than before.” On the one hand, negative underlying impacts on energy and food costs, along with reduced expectations of selling prices in industry, are pushing a further decrease in headline inflation.
However, underlying inflationary pressures are projected to rise due to forecasts of increasing service costs and wage rises. Core inflation is expected to continue falling, but overall inflation is predicted to be flat. “The only question is whether the ECB will go with 25 basis points or 50 basis points,” they continued. Only Robert Holzmann, governor of the Austrian Central Bank, publicly argued in favour of a 50 basis point cut. Some other hawks, like Isabel Schnabel, have recently abandoned the 50 basis point alternative without committing to it. “The flat inflation data plainly emphasises the need to continue rising, but the weaker-than-expected GDP growth report last week and poor credit and loan demand growth data today strengthen the argument for the slowdown in the pace of rate rises. We continue to expect a rate rise of 25 basis points this coming Thursday.
