Inflation in both the Eurozone and the United States is hitting record highs. This in turn may prompt central banks to raise interest rates faster. However, not because the increases will stop the rally in commodity prices, but to reduce negative real interest rates.
At its March 2022 meeting The European Central Bank unexpectedly accelerated its asset purchase schedule for the coming months and said the APP could end in the third quarter of this year if the medium-term inflation outlook does not weaken. Monthly net purchases will be €40 billion in April, €30 billion in May and €20 billion in June. The previously set version assumed levels of: €40 billion in Q2 this year, €30 billion in Q3 and €20 billion in Q4.
Inflation in the eurozone and the US
Key interest rates were kept at record low levels. During the press conference, President Christine Lagarde said that the ECB now sees inflation at 5.1 percent, higher than the 3.2 percent previously forecast, and GDP growth for the year is now slightly lower at 3.7 percent compared to 4.2 percent. Lagarde added that the war will have a significant impact on the economy and inflation through higher energy and commodity prices, disruptions to international trade, and reduced confidence. As a result, the market has begun to price in the possibility of a 40 basis point interest rate hike in the Eurozone by the end of 2022.
In the United States, the annual inflation rate accelerated to 7.9 percent in February 2022 and reached its highest level since January 1982. Energy prices had the biggest impact on inflation, rising 25.6 percent, including a 38 percent increase in gasoline prices. Excluding the volatile energy and food categories, CPI rose 6.4 percent, the most in 40 years.
Stock markets: back to the bear market
The biggest effects of Russia's wartime assault on Ukraine and the associated rise in energy costs may be yet to come. And they will get worse with the US ban on oil imports from Russia. Inflation peaked in March of this year, but recent developments in Europe, combined with continued supply constraints, strong demand and labor shortages, are likely to keep inflation high for an extended period of time.
Such an environment could be detrimental to equity markets, which may re-enter a downtrend after short-term hopes for a quick end to the war. While even before the war it was possible that stock market corrections would potentially end with the inflation peak being caught this quarter, now the inflation peak is definitely moving further into the future.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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