Irish businesses and mortgaged households may not have to fear an ECB rate increase for at least two years despite the hikes in inflation, according to an assessment from a leading credit ratings firm.
Fitch Ratings said its assessment comes despite the Bank of England having already raised rates and now the US Federal Reserve this week signalling it will increase rates there in March in response to inflation threats. However, Fitch said at the moment it doesn't "expect the eurozone’s core inflation dynamics to make a sustained break from the past".
"Inflation is currently above target due to a number of temporary factors, including global supply chain constraints, high energy prices, and base effects, but core goods price pressures are much lower than in the US and underlying inflationary conditions seem unlikely to firm up sufficiently in the medium term to warrant a rate rise under the ECB’s criteria," said Fitch senior analysts Tej Parik and Brian Coulton in their analysis.
Financial markets have been piling on bets that the ECB would fail to hold the line as inflation from Germany to Ireland set new 20-year records. Prices have been accelerating for well-documented reasons: All types of energy from gas to renewables are in short supply globally and across Europe this year and wholesale gas prices have soared. Making matters worse has been the struggles facing businesses with supply chain snarl-ups amid the global Covid-19 restrictions that have increased manufacturing and freight costs.
"We expect these inflationary factors to fade in 2022, and do not expect pandemic-induced large negative output gaps to close in most major eurozone economies until at least 2025," the analysts said. Fitch adds, however, "upside surprises" for wages could alter the calculations.