Euro zone inflation stood at 2% in December, flash data from Eurostat showed on Wednesday.
Economists polled by Reuters had expected the inflation rate to cool to 2%, in line with the European Central Bank’s (ECB) target. In November, the inflation rate stood at 2.1%.
Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, stood at 2.3% in the year to December, down from 2.4% in November, while the annual rate of services inflation cooled to 3.4%, compared with 3.5% in November.
The ECB held its key deposit facility rate at 2% for the fourth consecutive time in December, having last cut rates in June.
Top ECB board members told CNBC late last year that the easing cycle is close to, or at its end, although the central bank has repeatedly said it will take a meeting-by-meeting and data dependent approach to rate setting.
The euro and Stoxx 600 were unchanged on Wednesday following the data release, although the inflation rate returning to the ECB’s target could signal further rate cuts ahead.
“The move should please equity markets, as it gives the ECB yet another reason to cut interest rates further in 2026. That said, inflation has been hovering either side of the 2% level for most of last year, so today’s move is minor, but a positive, nonetheless,” Michael Field, chief equity strategist at Morningstar, said in emailed comments Wednesday.
“Central bankers walk a tightrope, attempting to stimulate the economy without igniting inflation. But with inflation low and steady, they should be able to take their foot off the brake and lean towards more stimulus sooner rather than later.”
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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision. The central bank left interest rates unchanged on Thursday, after implementing a cut in June.
LONDON — French stocks moved higher on Monday as markets reacted to a surprise win for the left in the country’s parliamentary election.
The CAC 40 erased earlier losses to rise 0.5% by 10:00 a.m. London time (5 a.m. ET). The euro was flat against the dollar, and trading in bond markets was also relatively muted.
The U.K.’s FTSE 100 was steady, while Germany’s DAX was 0.43% higher and the FTSE MIB was up around 1%. The pan-European STOXX 600 was 0.3% in the green.
France’s left-wing New Popular Front won the largest number of seats in this weekend’s parliamentary elections, scuppering an expected surge for the far-right. However, the coalition failed to secure an absolute majority, early data showed, leaving markets digesting the possibility of a hung parliament.
François Digard, head of French equity research at Kepler Cheuvreux, said a hung parliament was what the market was expecting.
“You have a hung parliament as expected so last week, the market has played this out … It was just expected to be more right-wing and at the end it is left-wing,” he told CNBC on Monday.
Deutsche Bank strategists added that markets will be suspicious of the New Popular Front’s “fiscally aggressive” spending and taxation plans.
“Last night the far-left were already talking about wealth taxes and increases on taxes on corporates which won’t be market-friendly. However trying to build a government that has any kind of stability looks a very high bar this morning. Political paralysis for the next 12 months seems the most likely outcome,” they added.
It comes after a general election in Britain last week, in which the opposition Labour Party win a landslide victory, unseating the Conservatives after 14 years.
In corporate news, soft drinks maker Britvic has agreed a takeover bid of £3.3 billion ($4.2 billion) from Carlsberg, at an offer of 1,290 pence per Britvic share. This was an improved bid from Carlsberg which first offered 1,200 pence per share but was rejected.
There are no major corporate earnings due out on Monday. It’s also quiet on the data front, with just German trade data due.
In Asia-Pacific, stocks were mixed Monday. In the United States, futures ticked lower as investors looked ahead to inflation data for hints on this year’s market rally and the next steps by the Federal Reserve. The June consumer price index is due Thursday, with producer price index data due Friday.
It comes after the bank’s policymakers lowered their annual growth forecast, as they confirmed a widely expected hold of interest rates.
ECB staff projections now see economic growth of 0.6% in 2024, from a prior forecast of 0.8%. Their inflation forecast for the year was brought to 2.3% from 2.7%.
The ECB on Thursday held interest rates steady for the third meeting in a row. The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation.
The ECB on Thursday held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower.
The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation, as investors instead chase signals on when the first rate cut may come and assess the ECB’s plans to shrink its balance sheet.
Robert Holzmann, governor of Austria’s central bank, speaks during an event in Vienna, Austria, on Tuesday, Sept. 26, 2023.
Bloomberg | Bloomberg | Getty Images
Austrian central bank Governor Robert Holzmann said the European Central Bank could implement one or two further interest rate increases, if there are “additional shocks” to the economy.
The hiking cycle could end, “if everything goes well,” but “if additional shocks come, and if the information we have proves to be incorrect, we may have to hike another time or perhaps two times,” Holzmann told CNBC on Tuesday, speaking from the International Monetary Fund’s World Bank Forum in Marrakech.
“We are still in a period in which we don’t know how long it will take to come to the inflation that we want to have, and whether we have to hike more,” Holzmann, who’s known for his more dovish stance amid the ranks of the ECB, added.
There is still an upside risk to inflation, he added, because “if you think you have it, then it becomes dangerous because then inflation may re-rise again.”
The European Central Bank opted to hike interest rates to a record in September, continuing a cycle that has lasted almost two years. The 10th consecutive increase brought the main deposit facility to a 4%, as the bloc continues to battle inflation.
In a market-moving statement in mid-September, the ECB also indicated that further hikes may be off the table for now.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” it said, causing the euro to fall to a three-month low.
Earlier on Tuesday, Holzmann’s French counterpart, Francois Villeroy de Galhau said “inflation is the sickness,” while forecasting a landing near 2% by 2025.
He added that there was a “clear downward trend” in prices, in an interview with franceinfo, as translated by CNBC.
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Major oil executives, policymakers and ministers convene in Abu Dhabi at ADIPEC this week to discuss energy markets as the world grapples with a transition to clean energy. It comes just weeks ahead of the COP28 climate talks, which will be held in Dubai later this year.
CNBC’s Steve Sedgwick is joined in Abu Dhabi by the CEOs of BP, Shell and other major international energy companies for a discussion on the challenges of the energy transition.
Titled “Actions for a net-zero world: solving the current energy trilemma,” Monday’s panel includes Murray Auchincloss, interim BP CEO, Occidental CEO Vicki Hollub, Eni CEO Claudio Descalzi, TotalEnergies CEO Patrick Pouyanne, Shell CEO Wael Sawan and Tengku Muhammad Tufik, the president and CEO of Petronas.
President of the European Central Bank (ECB) Christine Lagarde gestures as she addresses a press conference following the meeting of the governing council of the ECB in Frankfurt am Main, western Germany, on July 27, 2023.
Daniel Roland | Afp | Getty Images
The European Central Bank on Thursday announced a 10th consecutive hike in its main interest rate, as the fight against inflation took precedence over a weakening economy.
Rate raises have now hauled the central bank’s main deposit facility from -0.5% in June 2022 to a record 4%. A key reason for the hike Thursday appeared to be upward revisions in newly published staff macroeconomic projections for the euro area, which see inflation averaging at 5.6% this year from a prior forecast of 5.4%, and 3.2% next year from a prior forecast of 3%.
However, it nudged its closely-watched medium-term forecast lower, from 2.2% to 2.1%.
In a market-moving statement, it also indicated that further hikes may be off the table for now.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” it said.
“The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.”
The euro fell sharply on the announcement and was down 0.5% against the U.S. dollar at $1.0686 at 3 p.m. Frankfurt time, trading at a three-month low.
European stocks rallied following cautious trading through the morning, meanwhile, with the benchmark Stoxx 600 index up by 1.1%.
The ECB move on Thursday also takes the interest rates on its main refinancing operations and marginal lending facility 25 basis points higher, to 4.5% and 4.75%, respectively.
Staff also lowered economic growth projections for the euro area from 0.9% to 0.7% expansion in 2023, from 1.5% to 1% in 2024, and from 1.6% to 1.5% in 2025.
While the ECB has firmly signaled its next moves in previous meetings, economists and analysts were divided over whether the doves or hawks in Frankfurt would win out at this September meeting. Money markets indicated a roughly 63% chance of a hike through Thursday morning, up from a more even split in recent days.
Oil market reports suggesting tighter supply and higher prices through the rest of the year and beyond have fueled inflation fears, along with signs of wage growth. A Reuters article on Wednesday reporting the ECB now expects euro zone inflation to remain above 3% in 2024 appeared to increase market bets on a rate hike. The report came from a source ahead of the release of its projection Thursday.
“Some [Governing Council] members did not draw the same conclusion, and some governors would have preferred to pause and reserve future decisions once more certainty, more intelligence, would have resulted from the passing of time and the impact of our many previous decisions,” ECB President Christine Lagarde told CNBC’s Annette Weisbach in the press conference following the announcement.
“But I can tell you there was a solid majority of the governors to agree with the decision we have made.”
Lagarde said there was no concrete answer to whether rate hikes were finished since the Governing Council remains data-dependent — but she stressed the ECB’s current thinking was encapsulated in the statement around rates at current levels making a “substantial contribution” to the fight against inflation if held for long enough.
Germany is forecast to be the only major European economy to contract this year — though the wider picture is also downbeat, with euro zone business activity declining in August to its lowest level since November 2020.
Peter Schaffrik, chief European macro strategist at RBC Capital Markets, told CNBC that market focus would not so much be on the hike itself, but rather the language used by the central bank in its statement.
Schaffrik said one focus will be on the 2025 inflation forecast, which unlike forecasts for 2023 and 2024 was revised lower since this is typically what the ECB means when it talks about the medium term.
Another will be on its descriptor of rates being maintained for a “sufficiently long duration” — indicating the “path forward is flat for quite some time,” he said.
It announced a new rate increase of a quarter percentage point, bringing its main rate to 3.75%, completing a full year of consecutive rate hikes in the euro zone.
“Inflation continues to decline but is still expected to remain too high for too long,” the ECB said Thursday in a statement.
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European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.
The bank announced that it was taking its main rate up by 25 basis points to 3.5%, diverging from a U.S. Federal Reserve decision to pause its own hikes on Wednesday.
Calls to move away from relying on the U.S. dollar for trade are growing.
More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the U.S. dollar.
The U.S. dollar has been king in global trade for decades — not just because the U.S. is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback. Most commodities are also priced and traded in U.S. dollars.
But since the Federal Reserve embarked on a journey of aggressive rate hikes to fight domestic inflation, many central banks around the world have raised interest rates to stem capital outflows and a sharp depreciation of their own currencies.
“By diversifying their holdings reserves into a more multi-currency sort of portfolio, perhaps they can reduce that pressure on their external sectors,” said Cedric Chehab from Fitch Solutions.
To be clear, the U.S. dollar remains dominant in global forex reserves even though its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, IMF data shows.
The U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year, according to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period.
Based on CNBC’s calculation of IMF’s data on 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries.
“As China’s economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade etc,” Chehab told CNBC last week.
China — long among the top 2 foreign holders of U.S. Treasurys — has been steadily reducing its holdings of U.S. Treasury securities.
Analysts say changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways.
Trading in local currencies “allow exporters and importers to balance risks, have more options to invest, to have more certainty about the revenues and sales,” former Brazilian ambassador to China, Marcos Caramuru, told CNBC last week.
Another benefit for countries moving away from using the dollar as the middle man in bilateral trade, is to “help them move up the value chain,” said Mark Tinker from ToscaFund Hong Kong told CNBC “Street Signs Asia” early April.
“It isn’t about selling cheap stuff to Walmart, keeping down the prices for American consumers in order to earn dollars to buy its energy. This is now about actually a completely bilateral trade bloc,” Tinker said.
Meanwhile, growth of non-U.S. economic blocs also encourage these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year.
“U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing,” said Tinker. “I think there is going to be a re-internationalization of flows.”
Geopolitical risks have also accelerated the trend to move away from U.S. dollar.
“Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven that U.S. dollar really is,” said Galvin Chia from NatWest Markets told “Street Signs Asia” earlier.
Tinker said what accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022.
The yuan has reportedly replaced the U.S. dollar as the most traded currency in Russia, according to Bloomberg.
So far, the U.S. and its western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade toother currencies and increase gold in its reserves.
Although analysts don’t anticipate a complete break away from dollar-denominated oil trade over the short-term, “I think what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan,” said Chehab.
Despite the slow erosion of its hegemony, analysts say the U.S. dollar is not expected be dethroned in the near future — simply because there aren’t any alternatives right now.
“Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads,” Chehab told CNBC.
The Chinese yuan also falls short, Chehab said.
“If you look at the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions,” Chehab said. “That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective.”
Data from IMF shows that as of the fourth quarter of 2022, more than 58% of global reserves are held in U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world.
The international reserve system “is still a U.S.-reserve dominated system,” said NatWest’s Chia.
“So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility and free floating and the responsibility of a reserve currency, it’s hard to say dollar will be displaced over the next 3 to 5 years. unless someone steps up.”
— CNBC’s Joanna Tan and Monica Pitrelli contributed to this report.
In a statement, it pledged to “stay the course in raising interest rates significantly at a steady pace” and, in unusually firm language, said it intended to hike by another 50 basis points in March.
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European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.
The ECB, the central bank of the 19 nations that share the euro currency, opted for a smaller rate hike this time around, taking its key rate from 1.5% to 2%.
It also said that from the beginning of March 2023 it would begin to reduce its balance sheet by 15 billion euros ($16 billion) per month on average until the end of the second quarter of 2023.
Dollar strength has been the talk of the currency trading world for most of the year. The U.S. dollar index , which measures the dollar’s value relative to a basket of world currencies, rose to a two-decade high in September. It’s also hit all-time highs against several major currencies in recent weeks, including the British pound . Several market participants now believe the dollar rally, driven by the Federal Reserve raising interest rates more aggressively than other central banks, could fade over the next three to six months. Analysts expect the dollar to decline against 18 out of 38 currencies in the fourth quarter of this year, according to FactSet data. Moreover, they forecast the decline will widen to 10 other currencies for the second quarter of next year. CNBC Pro canvassed opinions from four investment banks and brokers on where they see the dollar heading. UBS UBS considers selling the dollar against G-10 currencies being a “top investment idea for 2023.” The Swiss bank said that it will be less about investment choices and more about portfolio rebalancing that’s likely to cause a sell-off in the dollar. According to the investment bank, years of negative interest rates have led to a sizeable un-hedged buildup of dollars worldwide. For example, the largest Japanese pension fund holds more than $500 billion of dollar assets, with only a small portion hedged, it said. With the dollar index rising to its highest level since 2001, UBS says such investors will begin selling dollars to reduce their risk of future losses. The bank suggests traders can look at USD worst-of put options, derivative contracts that go up in value when the dollar declines, against a basket of currencies such as EUR , JPY and GBP . ING The Dutch multinational bank thinks that while the dollar will strengthen in the near term, the Federal Reserve will likely sound the “all clear” on further rate hikes around March next year. But the Fed pivot alone might not be sufficient for the decline in the dollar, says Chris Turner, global head of markets at ING. “You do need the pull factor of some growth in the Eurozone or China to pull money out of what may be a 5% yielding dollar by that time 2Q23,” he said. Turner does warn that the decline in the dollar might be delayed if inflation proves to be “stickier” than expected and pushes the Fed to raise rates higher. He says when the time is right, and it isn’t now, traders could look at “put spreads, which would not be subject to the time decay.” BCA Research Analysts at BCA Research say from a technical standpoint, the dollar is due for a reversal. Echoing UBS’s view, BCA also suggests “long-term investors should begin to sell the dollar on strength.” The Montreal-based investment research group also said several catalysts could add downward pressure on the dollar, including central banks catching up with the Fed with rate hikes or an uptick in Chinese economic activity , among others. “In our view, we are only halfway through this checklist but nonetheless, conditions are falling into place for a bearish U.S. dollar stance,” said Chester Ntonifor, a foreign exchange strategist at BCA Research, in a note to clients. Goldman Sachs The Wall Street bank remains bullish on the dollar over the next three months and sees certain G-10 currencies only recovering beyond the six-month horizon. However, Goldman favors the Brazilian real , among certain other currencies, over the short term against the dollar following the election of Luiz Inacio Lula da Silva . “Brazil stands out clearly with sustained decreases in inflation, rising real rates, and an FX-supportive macroeconomic backdrop that should continue to drive foreign inflows into Brazilian assets among investors with a global mandate,” said the team led by Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs.
Euro zone inflation rose above the 10% level in the month of October, highlighting the severity of the cost-of-living crisis in the region and adding more pressure on the European Central Bank.
Preliminary data on Monday from Europe’s statistics office showed headline inflation came in at an annual 10.7% last month. This represents the highest ever monthly reading since the euro zone’s formation. The 19-member bloc has faced higher prices, particularly on energy and food, for the past 12 months. But the increases have been accentuated by Russia’s invasion of Ukraine in late February.
This proved to be the case once again, with energy costs expected to have had the highest annual rise in October, at 41.9% from 40.7% in September. Food, alcohol and tobacco prices also rose in the same period, jumping 13.1% from 11.8% in the previous month.
Monday’s data comes after individual countries reported flash estimates last week. In Italy, headline inflation came in above analysts’ expectations at 12.8% year-on-year. Germany also said inflation jumped to 11.6% and in France the number reached 7.1%. The different values reflect measures taken by national governments, as well as the level of dependency that there nations have, or had, on Russian hydrocarbons.
There are, however, euro nations where inflation rose by more than 20%. This includes Estonia, Latvia and Lithuania.
The European Central Bank — whose primary target is to control inflation — on Thursday confirmed further rate hikes in the coming months in an attempt to bring prices down. It said in a statement that it had made “substantial progress” in normalizing rates in the region, but it “expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.”
The ECB decided to raise rates by 75 basis points for a second consecutive time last week.
Speaking at a subsequent press conference, ECB President Christine Lagarde said the likelihood of a recession in the euro zone had intensified.
Growth figures released Monday showed a GDP (gross domestic product) figure of 0.2% for the euro area in October. This is after the region grew at a rate of 0.8% in the second quarter. Only Belgium, Latvia and Austria registered GDP rates below zero.
So far, the 19-member bloc has dodged a recession but an economic slowdown is evident. Several economists predict there will be a contraction in GDP during the current quarter.
The euro traded below parity against the U.S. dollar in early European trading hours Monday and ahead of the new data releases, and barely moved after the new figures. The euro has been weaker against the greenback and that’s also something the ECB has been concerned about with concerns that this will push up inflation in the euro zone even further.
Christine Lagarde, president of the European Central Bank, is expected to announce another 75 basis points hike.
Bloomberg | Bloomberg | Getty Images
While the European Central Bank is largely expected to announce another rate hike Thursday, market players are seemingly more concentrated on two other policy tools as the region edges toward a recession.
The central bank has been contemplating inflation being at record highs but an economy that is slowing, with many economists predicting a recession before the end of the year. If the ECB takes a very aggressive stance in increasing rates to deal with inflation, there are risks that it tips the economy into further trouble.
Amid this context, the ECB is widely seen raising rates by 75 basis points later this week. This would be the second consecutive jumbo hike and the third increase this year.
“The ECB will likely raise its three policy rates by 75 basis points and suggest that it will go further at its next few policy meetings without providing a clear guidance on the size and number of steps to come,” Holger Schmieding, chief economist at Berenberg, said in a note Tuesday.
Given the inflationary pressures — the September inflation rate came in at 10% — analysts are pricing in at least another 50 basis point hike in December. The bank’s main rate is currently at 0.75%.
“A growing consensus seems to be in favour of having the deposit rate at 2% by the end of the year, implying a 50 basis point hike in December, with a reassessment of the economic and inflation outlook in early 2023,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said in a note Friday.
Rates aside, there are two questions on the minds of market players that need answering: When will the ECB start unwinding its balance sheet, in a process known as quantitative tightening, and what will happen to the lending conditions for banks in the near future. The ECB has undertaken years of quantitative easing, where it buys assets like government bonds to simulate demand, following the euro crisis of 2011 and the Covid-19 outbreak in 2020.
“When it comes to QT, boring is beautiful,” Ducrozet said, adding that he expects the process to start in the second quarter of 2023. QT is expected “to be predictable, gradual, and passive, starting with the end of reinvestments under the Asset Purchase Programme (APP) but not actively selling bonds any time soon,” he said.
Camille De Courcel, head of European rates strategy at BNP Paribas, said in a note Monday that the central bank might wait until the December meeting to provide details on QT but that it is likely to start reducing its balance sheet by about 28 billion euros on average per month when it does happen.
But perhaps the biggest uncertainty at this stage is whether lending conditions will change for European banks.
“We think Thursday [the ECB] will unveil a decision on the TLTRO, either its remuneration, or its cost. We think the new measure will only come into effect, in December,” De Courcel said.
The targeted longer-term refinancing operations, or TLTROs, is a tool that provides European banks with attractive borrowing conditions — hopefully giving these institutions more incentives to lend to the real economy.
Because the ECB has been increasing rates faster than the central bank initially expected, European lenders are benefiting from the attractive loan rates via TLTROs while also making more money from the higher interest rates.
“The optics are bad against the backdrop of a historical shock to households’ income, and political pressure cannot be ignored,” Ducrozet said.
The euro traded marginally higher against the U.S. dollar on Wednesday at $0.997. The weakness of the common currency has been a concern for the central bank though it repeatedly states that it does not target the exchange rate.
