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Eurozone inflation accelerated more than expected to breach 4% for the second time ever, adding to the challenge for the European Central Bank in fighting increasingly aggressive market bets to raise interest rates.
Consumer prices rose 4.1% in October, compared to economists’ average estimate of 3.7%, according to figures released by Eurostat on Friday. A measure that excludes volatile ingredients like food and energy rose to 2.1%, a rate not seen in nearly two decades.
On the eve of the data, European Central Bank President Christine Lagarde tried to back off investor bets that her institution would have to raise interest rates next year, declaring such pricing contrary to her own analysis and policy guidance.
That left investors unaffected. On Friday, they began pricing rate increases of 20 basis points by October 2022, even before Lagarde tried to convince them that their expectations were far from reality.
“There is no doubt that investors have a different view on inflation than the ECB,” said Rishi Mishra, analyst at Futures First.
Lagarde acknowledged that the faster rate increases would last longer than the ECB had previously expected, but she also stuck to the view that they would slow down through 2022.
What Bloomberg Says About Economics…
Eurozone inflation in October hit an all-time high in the face of rising energy prices. We expect it to accelerate further in November, but that should mark the peak.”
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Her attempt to counter investor speculation stopped short of saying markets were wrong to bet on a rate hike next year. Officials familiar with the matter said this reflects agreement among members of the Governing Council that such a move could be counterproductive.
Based on market prices, investors expect the European Central Bank to raise borrowing costs for the first time in more than a decade to bring the deposit rate below 0.3% within a year.
The shift in the markets comes amid rising global inflation that some central banks – including the Bank of England and the Bank of Canada – have already shifted.
Stay tuned for our update on the latest economic data here.
Companies are struggling to deal with the erosion of global supply chains, causing costs for parts, raw materials and shipping to soar. Meanwhile, energy prices in the eurozone rose 23.5% in October, up from 17.6% the previous month, amid the natural gas crisis.
The anticipation of higher borrowing costs is also being felt in European bond markets. Italian and Greek 10-year debt yields – often considered the riskiest in the region – jumped 22 basis points and 11 basis points, respectively, to 1.29% and 1.17%. This pushed Italy’s record borrowing costs to their highest since July last year.
Professional forecasters surveyed by the European Central Bank also boosted their inflation forecasts for the period to 2023, although they continue to see a sharp slowdown in 2022 from the current level, according to a report on Friday. Respondents expect price growth of 1.9% in 2022 and 1.7% in 2023, below the European Central Bank’s target of 2%.
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