Policy Thresholds for the Euro Area

The inflation situation is also hot in the Eurozone, as evidenced by current data and price trends.

Global and regional inflationary risks… The inflation situation is also hot in the Eurozone, as evidenced by current data and price trends. Therefore, the main focus for policy will be inflation readings. While the economic recovery is still in strong expansion territory, it risks some slowdown given the rise in Covid-19 cases. Record inflationary pressures and renewed COVID-19 concerns do not bode well for the outlook and cloud the forward picture. Trends in industry cost and record price increases driven by the global supply chain suggest we may continue to see continued price pressures.


Headline inflation and sub-indicators in the Eurozone… Core inflation rose to 2.6% and energy inflation to 27.4%… Source: Bloomberg, Eurostat


Contrasting risks to economic recovery… In terms of growth, there are current concerns of the Omicron variant and risks from global supply chain disruptions. The increase in Covid-19 cases adds uncertainty to the short-term economic outlook, causing less clarity in terms of ECB policy as it obscures the Eurozone's economic outlook for the coming year. Some restrictions that may be implemented in some countries, especially in Germany, may bring periodic recession risks in terms of the potential to affect the demand for services in the midst of the new virus wave. Any imminent policy tightening from the ECB looks far away (no rate hike expected until 2024) and there is a risk that asset purchases may need to be accelerated again.


The energy problem in the main reflections of inflation… The main driver of inflation accelerating to 4.9% is energy prices. Price pressures increased as the demand for natural gas originating from industrial goods and electricity production and especially high end-consumption demand in the winter period entered the global supply shortage. In terms of energy supply, an actor like Russia, which uses a strategic trump card such as Nord Stream 2 in terms of gas supply to Europe, especially in terms of Putin's strategic advantage against the USA, has confused things. Price pressures are likely to remain high due to understocks and high seasonal consumption.


Germany, France, Italy and Spain CPI rates comparison… Source: Bloomberg, Eurostat


Conclusion? As inflation is more than double the ECB target band, plus inflation pressures may be felt higher in European economies experiencing energy supply crises, it is very likely that the Bank will make a strategic shift to buy less assets at this stage. We expect decisions to be made in this direction at the December meeting, the transition to the phase of termination of PEPP, and the continuation of asset purchases within the APP. We think that there is still a long distance to the rate increase threshold due to the potential slowdown in the manufacturing and services sectors. On the other hand; The risks of slowing growth due to the continued rise in energy prices, the slowdown in the supply of goods together with the threat of restrictions that may be brought by the increase in the number of cases, the increase in food prices, and the slowdown in production due to supply shortages in the industry also have the potential to increase inflation.

Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı