Nordea’s Chief Analyst Anders Svendsen and Chief Economist Tuuli Koivu note Euro area inflation rose to 2.5% year-on-year in March and is expected to approach 3% in coming months. With energy contributing more and inflation expectations rising, they argue the case for European Central Bank (ECB) rate hikes is strengthening, especially if Oil, gas and electricity prices continue climbing.

Energy-driven upside risks to prices

"Inflation rose to 2.5% y/y in March. We expect inflation to rise to around 3% y/y in the coming months. The arguments for the ECB to start raising rates are mounting, and the likelihood of seeing no hikes at all this year is diminishing."

"Today’s inflation reading was the first since the start of the war in the Middle East and an important piece of information for the ECB to assess the need to hike rates alongside survey data and anecdotal evidence from different sectors of the economy. However, the ECB will get the details from the final reading before the next meeting on 30 April."

"Even with oil and gas prices at current levels, we believe energy prices will be somewhat higher in April. "

"Oil prices have risen before and also to current levels. That may be enough for the ECB to hike rates this time because 2022 is fresh in people’s minds and inflation expectations therefore may prove less anchored. However, the impact on inflation and growth and the reaction from the ECB will be much bigger should gas and electricity prices continue to rise from the current “higher-but-still-low” levels."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)