Early February Inflation Readings Remain Worrying, What Steps Will the ECB Take?


 New data from the European zone on Thursday indicated that inflation took some time to drop significantly, raising the prospect of further rate hikes in the region in the coming months.

Headline inflation across the European bloc reached 8.5% in February, based on preliminary data released today. This shows that the price is not falling at the rate that nature has been aiming for in recent months. Headline inflation reached as high as 10.6% in October, but has eased to 8.6% after being revised in January.

Analysts polled by the Wall Street Journal had expected a lower February inflation rate of 8.2%. Food prices increased month-on-month, offsetting lower energy costs.

In addition to the small fall in headline inflation, core inflation rose to an estimated 5.6% in February, from 5.3% in January. Taken together, this fueled the argument that the European Central Bank could maintain its hawkish stance for much longer.

In recent days, market participants have weighed in on this prospect following warmer-than-expected February inflation figures from France, Germany and Spain.

ECB President Christine Lagarde said that lowering inflation will still take time. The ECB still maintains its main target of 2%.

Analysts at Goldman Sachs said earlier this week that they were increasing their rate hike expectations for the ECB and priced in another 50 basis point hike in May.

European bond yields have moved at multi-year highs in recent days, amid considerations that hawkish monetary policy will remain.

Analysts at Capital Economics shared the view stating, "February's increase in core inflation will strengthen ECB policymakers' confidence that a significant rate hike is needed."