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Tomorrow sees the release of Eurozone flash CPI figures in the context that many ECB officials are talking up the possibility of larger rate hikes coming in the future. Money markets yesterday were fully priced at a terminal rate of 4.0% for the ECB. That would imply a further 100bps of hikes in the coming months, over the 3.0% reference rate at the moment.

We should also remember that the ECB formally started its already-announced QT operations today. That means it is allowing up to €15B in bonds to “roll off” the balance sheet, which is expected to raise interest rates. With data and commentary staking up for further monetary pricing, there is a lot of attention on the preliminary inflation numbers tomorrow.
 

We already have a sneak peek

Through the course of the morning, German states have been reporting their CPI, which typically sets up the expectation for the largest economy within the EU. Combined with the preliminary French CPI which was also released earlier today, that gives many analysts a pretty good idea of what to expect from the CPI figures.

But, there can always be surprises. Last month is a prime example, where a technical glitch led to Germany reporting its inflation figures after the full Eurozone release was made public. As a consequence, there was a revision in the final numbers, and inflation was recorded as the highest in history.
 

What are the expectations?

Eurozone Flash February CPI is expected to show an annualized drop to 8.2% from 8.6% in January. Core inflation is expected to come down, but not by as much, as it's forecast at 5.2% compared to 5.3%. Monthly inflation, however, is expected to rocket up by 0.5% from -0.2% prior, suggesting that in the near term, inflation pressure remains.

In the early part of Wednesday morning, German states reported higher inflation than markets expected, with an average of 0.2ppt higher than expectations. If the trend holds, Eurozone inflation could come in above expectations and reaffirm the narrative that the ECB will hike by at least 50bps at the next meeting, and potentially could announce a larger amount of QT.
 

Where to now?

From the minutes from the last meeting, it was revealed that many members wanted higher rates, and were even discussing a larger amount of QT. Unless inflation comes down substantially, ECB members could be under increased pressure this time around to do more.

German representative Nagel was the latest to talk up the possibility of higher rates, saying that hikes would need to continue after the March meeting. Just two months ago, Lagarde was talking about taking a pause after March to assess the situation. Now it appears that the consensus has shifted to keep pushing rates higher. Unless there is a really big surprise with the data tomorrow.

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