By Geoffrey Smith
Investing.com — Inflation in the euro area has reached its highest level because the creation of the only forex in March, as a mixture of free tax and financial cover, supply chain constraints and soaring energy costs, mixed a toxic cocktail for the financial system.
It increased by 7.5% over the 12 months, from 5.9%, after a jump of 2.5% in March alone. The increase, which excludes additional unstable components such as gas and energy, was much more extreme at 3.0%.
Economists had expected the overall annual fee to rise to just six.6%.
The figures had only been released hours after a series of closely watched business surveys confirmed a sharp slowdown in business activity in March, although they nevertheless continued to show financial growth. The IHS Markit purchasing managers’ index fell to 56.5, its lowest level in more than 12 months and also worse than consensus forecasts. The information is among the many first to include the calendar since Russia invaded Ukraine in late February, triggering the worst gun battle on the continent in 30 years.
The information will put pressure on the European central Financial institution to tighten financial coverage faster than it currently expects. The ECB’s deposit fees remain at -0.5%, and it would not plan to lift them until it ends its bond-buying program, which could take place at the earliest in summer time below its current level.
“There could also be an acceleration in the pace of reducing the quantitative easing program, but any ECB motion on fees seems unlikely before the end of the third quarter,” said Mark Dowding, director of financing at BlueBay Asset Administration, in a nutshell to buyers.
Still, he said year-over-year fees aren’t expected to rise much more, largely because of the core results. In daylight saving time, he said, “inflation is more likely to be heading for a decrease. Subsequently, we could currently see a second peak of tension on central banks.”
The EURO was relatively unaffected by the figures, falling 0.1 per cent to $1.1055, while the yield on the authorities’ benchmark bond rose by three fundamental factors to 0.58 per cent, after hitting a four-year high of 0.72 per cent earlier in the week in response to preliminary German data for the month, before falling sharply on Thursday.
The markets are currently betting that the ECB will succumb to the tension and raise interest rates very quickly, following the example of a US Federal Reserve that has significantly accelerated its schedule of tightening financial coverage in the current months. Short-term interest rate futures indicate that the ECB could increase its key deposit fees to 1.5% by the end of 2023.
Earlier this week, ECB President Christine Lagarde again insisted that any interest rate rise can be gradual and that the spike in costs is still more likely to be short-term, although it is likely to be increased and last longer than expected. The ECB’s current forecasts – which may be subject to increasing scrutiny given the current overshoot – nevertheless assume that core inflation will be below 2% in 2023 and 2024.
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