Shares rise, but ECB interest rate hikes have 'a long way to go'

Analysts also warn of the chunky and apparently broad-based rise in core inflation, from 5.3% in January to a record high of 5.6%

Thu, 02 Mar, 2023 - 20:01

European shares rose, boosted by consumer and energy companies, but data suggesting eurozone inflation remained stubbornly high has bolstered fears of more European Central Bank rate rises.

The strength of core inflation means the ECB has “a long way to go” before easing up in its fight against inflation by hiking interest rates, said Jack Allen-Reynolds, chief eurozone economist at Capital Economics.

“For some time we have been forecasting a 50 basis point hike at the meeting in two weeks’ time and another in May, but further hikes at later meetings now look increasingly likely,” Mr Allen-Reynolds said.

Consumer price inflation in the 20 countries sharing the euro currency rose 8.5% in February, compared with an increase of 8.6% a month earlier on lower energy prices, but fears lingered over stubbornly high rates of core inflation.

“More important for the monetary policy outlook is the chunky rise in core inflation, from 5.3% in January to a new record high of 5.6%, which looks broad-based as both core goods and services inflation increased,” Mr Allen-Reynolds said.

“High inflation means more aggressive ECB rates, which means less conducive business conditions for European companies,” said Giles Coghlan, chief market analyst at HYCM.

Earlier in the week, data from Spain, France, and Germany indicated that inflation remained sticky and fed into fears that the ECB would remain hawkish for longer.

ECB president Christine Lagarde said price declines have not been stable and that rates will have to rise higher and stay higher for some time.

Still, the market momentum for global stock markets has stalled of late as investors price in steep prices and higher rates.

The continent-wide Stoxx-600 shares index reversed early losses and closed 0.5% higher. The Ftse-100 in London was boosted by a weaker sterling, while the Iseq index in Dublin rose after shares in building products heavyweight CRH climbed 8% on record earnings.

“There’s certainly the assumption that there is still mileage in the tank when it comes to price increases, that margins can be protected, the consumer is going to be resilient to a degree and these companies are still going be able to make money,” said Danni Hewson, financial analyst at AJ Bell.

“Inflation was clearly worse than forecast but maybe not as bad as feared given expectations had shifted following national data in the last few days,” said Ben Laidler, global markets strategist with Etoro in London.

“I think the base case is the ECB keeps on at a 50 basis point hike pace, which would still be pretty hawkish,” Mr Laidler said.

Investors now see the ECB’s 2.5% deposit rate rising by a combined 100 basis points in March and May, then to around 4.1% at the turn of the year.

Markets have priced in an extra 50 basis points of hikes in just the past month.

Sterling was held back by remarks from Bank of England governor Andrew Bailey, who said “nothing is decided” on future rate increases which had traders trimming back bets on higher rates.