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European central bank will likely decrease the rates soon. Inflation has decelerated substantially

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Apme Fx | European central bank will likely decrease the rates soon. Inflation has decelerated substantially

The European Central Bank has most likely definitively ended its cycle of raising interest rates, and the first decrease will probably come already during the spring period. Not only many experts think so, but also the latest data on the rate of price growth in the eurozone indicate that the inflationary crisis is behind us. Of course, aware of all the risks that continue to persist due to the heightened geopolitical situation in the world.

According to Eurostat's current flash estimate, the year-on-year inflation rate in January in the eurozone countries was 2.8 percent. This is 0.1 percentage point less than in December. December fears that inflation had gained strength again were not confirmed. The rate of inflation in the eurozone thus reached almost the level of the two percent target.

For the European Central Bank, this may be a signal that it is time to start lowering interest rates slightly again. The basic interest rate of the ECB is at the level of 4.5 percent, where the central bankers already increased it last September. The ECB has therefore been waiting for a relatively long time, thus making it clear that it does not want to go any higher with rates.

January's inflation can therefore be seen as one of the last verifications that inflation is indeed on the way down and that the ECB might take courage and send interest rates southwards. Nevertheless, we cannot completely ignore the risks that, if they materialize, could accelerate inflation again.

The biggest one is the ongoing unrest in the world, especially in Ukraine, where the war conflict caused by Russian aggression against its neighbour has been going on for almost two years. Added to this was the terrorist action of Hamas against Israel last October, which was followed by Israel's military retaliation aimed at the Gaza Strip, which also continues to this day.

Both armed conflicts thus keep the commodity markets in particular under tension. Although the prices of oil and natural gas have fallen significantly compared to last year and the year before,* they can go up again relatively quickly. [1]

A possible recurrence of the energy shock, even if to a lesser extent than we experienced it, could once again accelerate inflation in the Eurozone and thus prompt the European Central Bank to re-tighten the monetary policy. The good news is that the countries of Western and Central Europe have been able to significantly reduce their dependence on the import of energy commodities from Russia.

It is energy prices that are the main factor behind the relatively rapid disinflation in the eurozone. In a year-on-year comparison, energy prices fell by 6.3 percent in January. Conversely, food prices increased by five to seven percent year-on-year, depending on the specific group of goods.

In month-on-month terms, the eurozone even experienced deflation in January, when prices fell by 0.4 percent compared to December. The biggest discount occurred in industrial goods, by 2.4 percent. Energy prices went up by less than one percent month-on-month.

In the coming months, it can be expected that inflation will gradually run out even for food products. This trend is likely to intensify during the summer, when seasonal types of food, especially fruits and vegetables, begin to appear on store shelves. So, barring unexpected adverse circumstances, it seems that the inflationary crisis in the Eurozone is definitely behind us.

 

Peter Svoreň, Apme FX

 

* Past performance is no guarantee of future results.

[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

 

Disclaimer:

The material herein is considered as marketing communication under the relevant laws and regulations, and as such is not a subject to any prohibition on dealing ahead of the dissemination of investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and should not be construed as containing investment advice, or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. The published content is intended for educational/informational purposes only. It does not take into account readers’ financial situation, personal experience or investment objectives. APME FX Trading Europe Ltd makes no representation that the information provided is accurate, current or complete; and therefore, assumes no liability for any losses arising from investments based on the supplied content. The past performance is not a guarantee of future results.

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