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The acceleration in inflation is likely to be temporary
At the end of the summer and autumn, inflation in the Eurozone slowed significantly, and in November the annual inflation rate was only 2.4 percent, or just 0.4 percent. Points exceeded 2 percent. the target set by the European Central Bank (ECB). However, inflation indicators for the euro area were slightly less positive in December – inflation results were both positive and negative.
Turning to the negative aspect of Eurozone inflation in December, Eurozone inflation accelerated from 2.4 percent in December. rose to 2.9 percent in November. On the positive side, however, the most important element of inflation in the euro area and the one most closely monitored by the ECB – net inflation (excluding food and energy prices) – continued to slow in December, falling to 3.4 percent. This is the lowest value of net inflation in the euro area for 21 months, i.e. for almost two years.
It should also be emphasized that the acceleration of general inflation in the euro area is likely to be temporary. Because this acceleration is significantly influenced by the reduced prices for energy resources and the gradual abolition of temporary measures aimed at compensating for the increase in energy prices for companies and residents in various Eurozone countries.
In principle, leading indicators continue to point to a further slowdown in inflation in the euro area, particularly net inflation. In November, for example, German import prices were 9 percent. lower than in 2022 in November and German industrial production prices were 7.9 percent. lower than in 2022 in November. These indicators are consistent with inflation in the euro area and allow us to make assumptions about inflation in the euro area for several months.
As EURIBOR falls, the final interest rates on the loans also fall
Finally, it should be noted that inflation in the Eurozone has accelerated less than the market expected in December. Economists forecast that inflation in the euro zone would accelerate to 3 percent in December, but the actual result was slightly lower, reaching 2.9 percent. In other words, this December acceleration in inflation in the Eurozone was not unexpected – the market had been predicting an acceleration in inflation for some time and was expecting a somewhat stronger acceleration than the facts showed.
With inflation in the Eurozone increasing less than the market expected and net inflation continuing to slow, market participants continue to see fairly aggressive interest rate cuts in the Eurozone. Economists polled by Bloomberg continue to expect the European Central Bank to start cutting interest rates in April this year, and overall experts expect the ECB to cut interest rates five to six times this year. In other words, the market believes for now that this acceleration in Eurozone inflation is temporary and does not fundamentally change the prospects for an aggressive interest rate cut in the Eurozone.
In addition, market experts continue to predict a decline in EURIBOR, on which interest rates on final loans for both Lithuanian residents and companies largely depend. At the beginning of the second week of January, 3 months. The value of the EURIBOR was 3.93 percent, and that in 6 months The value of the EURIBOR is 3.91 percent. The latest forecasts show that in April 3 and 6 months EURIBOR will reach 3.6% each. and 3.48 percent, in July – 3.15 and 3.06 percent and in December – 2.5 percent each. If the current forecasts are confirmed, as EURIBOR falls, the final interest rates for loans in Lithuania will also fall.
Risks include ECB caution and ship attacks in the Red Sea
However, it should be borne in mind that the market is currently very aggressively forecasting both the decline in key interest rates and EURIBOR in the Eurozone and several factors and risk factors can undermine such forecasts.
First, even if inflation in the Eurozone slows to 2% in the spring, the ECB may be inclined to wait and may not be in a hurry to cut interest rates immediately, according to the forecast for a rate cut in the Eurozone in April, which is somewhat bold .
The second will be completed in 2023. also in 2024. At the beginning, the global economy was confronted with new inflation risks. Due to ship attacks in the Red Sea, global shipping companies have begun rerouting container flows from the Suez Canal and the Red Sea around Africa, delaying the arrival of containers from Asia to Europe by 10 to 14 days, also increasing the cost of container transportation. Accordingly, the price for container transport from Shanghai to Rotterdam has risen by up to 83 percent since the beginning of December last year. If ship attacks in the Red Sea do not stop, the increased cost of container shipping could impact euro zone inflation in a few months.
In summary, most experts currently agree that key interest rates in the euro area will fall, but there is a risk that the actual rate cut will be somewhat more modest than the market currently expects.
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