By 4% and the highest level in its history Eurozone now the market expects the final deposit rate to increase h European Central Bank, because, as the latest data for the major eurozone countries show, the fight against inflation is not over yet. The ECB has already raised interest rates by 300 basis points since July, from -0.5% to 2.5%, the fastest monetary tightening ever, and is widely expected at its March meeting, two weeks after today , will continue a new increase by 50 bp, as it has already announced its intention. Although many analysts predicted a slowdown in growth rates after March and a possible cessation of growth in May-June, the new data completely changes the game.

February inflation data released this week from the likes of France, Spain and Germany has changed the outlook for monetary policy, at least in terms of how it is perceived by the market. While investors believed in early 2023 that the ECB, like most international central banks, was nearing the end of its rate hike campaign, pushing government bonds to rally, estimates have changed dramatically. Goldman Sachs noted in a new report that it now expects a fourth 50 basis point rate hike in May from 25 basis points. previously expected, with the final ECB interest rate set at 3.75% by June (vs. 3.5% earlier), and the ECB board is expected to keep interest rates high until the fourth quarter of 2024. What’s more, ECB chief economist Philip Lane said in an interview with Reuters that when the ECB stops raising it could keep interest rates high for “several quarters.”

The consumer price index in France and Spain rose unexpectedly in February to 7.2% year on year from 7% in January and to 6.1% from 5.9% in January, respectively.

Rising inflation in France, Spain and Germany in February changed the outlook for monetary policy.

Analysts had expected price growth to remain unchanged, forecasting 7% inflation in France and slower growth in Spain. The figures, released on Tuesday, prompted investors to estimate for the first time that the ECB’s deposit rate will hit 4% from an earlier forecast of 3.5% as it reinforces the argument of the ECB’s hawks, who make up the majority on the board, that larger hikes are needed to take inflation under control, even though the economy proved to be more resilient than many feared. This market position was further “confirmed” by new German price data for February released yesterday, which also showed an unexpected acceleration. In particular, consumer prices rose 9.3% year on year against analysts’ expectations of 9% and growth of 9.2% in January.

“Rising inflation in these three countries suggests that headline inflation in the euro area likely rose from 8.6% to 8.8% in February rather than falling to 8.1% as expected. This will support the aggressive mood of the ECB,” said Capital Economics.

Bundesbank President Joachim Nagel also said the March interest rate hike would not be the last, adding that “further significant interest rate hikes may be needed in the future.”

A change in market interest rate expectations has triggered a sell-off in eurozone bonds this week, with German 2-year yields hitting 3.2% yesterday, the highest level since 2008, while 10-year yields soared to 2.7% and 12- summer highs. The yield on Italian 10-year bonds rose to 4.6%, while the yield on the corresponding Spanish bonds rose to 3.75%. Greek bonds proved to be more resilient, with the 10-year yield marginally up to 4.45% and the spread narrowing to 174bp.