Energy-Driven Inflation Fuels Expectations for Euro-Zone Rate Hikes
The European economy is experiencing its highest inflation rates in years due to rising energy costs. In September, readings for Germany, France, Italy, and Spain all exceeded analyst estimates, with Spain recording a rate of 5% - the highest since 2023. This mirrors the region's last inflation spike after Russia invaded Ukraine.
The driving force behind this inflation is fuel costs, which are expected to push price gains for the euro zone towards 4% later this year. A Bloomberg survey puts the bloc's September number at 3.7%, but there are upside risks due to recent overshoots.
As a result, higher interest rates are likely, although bets on the European Central Bank's (ECB) third move since the Iran war broke out have receded. ECB President Christine Lagarde believes that the global bond-market selloff will help quell prices and ease pressure on bonds.
Despite this, markets still see up to 90 basis points of tightening by next autumn. Some investors are taking advantage of the selloff in shorter-dated bonds, betting that market-implied pricing has gone too far. Lagarde has emphasized that interest rates do not move in lockstep with energy prices and will slow growth and reduce pass-through more than projected.