Eurozone inflation to show fresh record high level this week

European Central Bank is expected to chart its policy course at a March 10 meeting

European Central Bank president Christine Lagarde.

The eurozone’s inflation reading for February, which is due on Wednesday, is set to show yet another record number; with economists predicting the rate hit 5.4%.

Price pressures are set to continue with Russia’s invasion of Ukraine having sent oil prices above $100 a barrel for the first time since 2014, threatening an economy that’s also suffering from supply shortages and lingering pandemic curbs.

That jumbles the situation for the European Central Bank, which is expected to chart its policy course at a March 10 meeting.

ECB officials — including president Christine Lagarde, vice-president Luis de Guindos, chief economist Philip Lane, and Bundesbank president Joachim Nagel — may offer some clues when they speak at the start of the week, before the ECB’s quiet period sets in on Thursday, when the account of the February meeting is published.

While rate setters have indicated that the conflict in Ukraine may delay policy normalisation, money markets only pared tightening wagers by a whisker, maintaining pricing for a quarter-point hike by October and a 40-basis-point increase by year-end.

That’s all driven by inflation concerns, with one market gauge of euro-area core inflation having risen to the highest since the global financial crisis in 2008.

“Given our expectations for strong labour market and inflation data in coming months, we still see the ECB exit timetable broadly on track for second-half normalisation,” said Goldman Sachs analysts.

But due to the elevated uncertainty, they see risks that their forecast for two 25-basis-point rate hikes this year may be delayed.

Belgian central bank chief Pierre Wunsch said over the weekend that he agrees with the expectation that the ECB will halt bond purchases in the third quarter and raise rates at the end of this year or early in 2023.

Last week, Mr Lane was reported to have suggested the Ukraine conflict may reduce the eurozone's economic output by 0.3%-0.4% this year.

On Friday, Ms Lagarde said the ECB will do everything in its power to safeguard the stability of prices and the financial system in the euro area.

While it’s too early to judge the overall economic impact of Russia’s invasion of Ukraine, persistent uncertainty will likely drag on investment and consumption and impede growth, Ms Lagarde said, with inflation likely to be boosted further by rising energy costs.

Elsewhere, the Bank of England’s next policy meeting isn’t until March 17, when investors expect another 25-basis-point increase. Four Bank of England policymakers are scheduled to speak Tuesday and Wednesday.

Meanwhile, US Federal Reserve chair Jerome Powell must strike a delicate balance before Congress in the coming week as he aims to reassure Americans the country’s central bank will confront high inflation at the same time war in Ukraine clouds the economic outlook.

Mr Powell will likely endorse recent signals from his colleagues that the Fed remains on track to raise interest rates in March. Still, Russia’s invasion of its neighbour has injected a dose of uncertainty as the conflict contributes to additional price pressures that risk cooling demand.

While acknowledging the precarious situation, Fed policy makers speaking since the conflict began have played down the grounds for delaying rate lift-off at their March 15 to 16 meeting — including at least least one who favours a half-point hike if the economic data keep coming in too hot.