Eurozone inflation jumps to record 10.7 percent

Consumer price growth in the 19 countries sharing the euro accelerated in October, putting pressure on the ECB.

A shopper pays with a ten Euro bank note at a local market in Nice, France
A shopper pays with a 10 euros banknote at a local market in Nice, France [File: Eric Gaillard/Reuters]

Eurozone government bond yields have risen after inflation data showed consumer prices climbed at a record pace in October, heaping pressure on the European Central Bank to continue aggressive policy tightening.

Consumer price growth in the 19 countries with euro as their monetary unit accelerated to 10.7 percent in October from 9.9 percent a month earlier, Monday’s data showed.

Inflation excluding unprocessed food and energy accelerated to 6.4 percent from 6 percent, while an even narrower measure that also filters out alcohol and tobacco rose to 5 percent from 4.8 percent.

The data points to further rate increases from the European Central Bank (ECB) in an attempt to bring inflation back down towards its target.

“The ECB’s goal of pushing the inflation rate back to just under 2 percent on a sustainable basis seems a long way off,” Commerzbank senior economist Christoph Weil said, noting the ECB forecast inflation at 9.2 percent in the final quarter of 2022.

“This also increases the pressure on the ECB Governing Council to further raise key rates sharply,” Weil added.

Germany’s 10-year yield

By 10:27 GMT, Germany’s 10-year yield, the benchmark for the euro area, was up 6 basis points (bps) to 2.147 percent.

Germany’s two-year yield was up 4 bps to 1.968 percent.

The ECB policy meeting on Thursday had pushed investors to bet on a slower pace of rate hikes, but policymaker comments since the meeting and elevated price pressures suggest the central bank remains in tightening mode.

Money markets are pricing in a 50 bps rate hike at the December meeting, with about 140 bps of further tightening priced in for this cycle, according to data from Refinitiv.

On Sunday, ECB governing council member Klaas Knot helped push back expectations for a slower pace of tightening, saying it was likely the next hike would be a choice of 50 or 75 bps.

Italy’s 10-year government bond yield rose 9 bps to 4.243 percent, pushing the spread between Italian and German 10-year yields wider by 3.5 bps to about 209 bps.

Black Sea grain deal

Eyes were also on the inflationary effect of Russia suspending participation in a UN-brokered Black Sea grain deal.

Chicago wheat futures jumped almost 6 percent on Monday and corn rose more than 2 percent as Russia’s withdrawal from the agreement raised concerns over global supplies.

“Food inflation has been a big deal and any decline in grain shipments from Ukraine is not going to help the inflation issue,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

“It’s another wrinkle to add to the many inflationary issues out there.”

Looking further ahead, investor focus looks set to turn to the Federal Reserve policy meeting on Wednesday.

The Fed is likely to raise rates by 75 bps at the meeting but is seen slowing the pace of hikes from December.

“We’re of the view that no one is going to be pivoting yet. Any confirmation around that view will be pretty significant,” Rabobank’s Graham-Taylor added.

Source: Reuters