- Credit Risk
- Sovereign Debt
In November 2018, Eurozone inflation continued to rise, standing at + 1.9% on a YoY basis after last summer's highs. On the big 4 side of Economic and Monetary Union, the same trends are at work. German and French inflation slowed slightly to 2.2% in November while Spanish and Italian inflation fell in intensity to stand at + 1.7% and + 1.6% respectively, on a YoY basis. In the Eurozone, the inflation carry-over for 2018 is now + 1.75% and it is therefore almost certain that annual average inflation will be in the range of +1.8 to + 1.9%, i.e., in line with the target of the European Central Bank (close to but below 2%). However, the recent fall in oil prices (-33% since the peak of early October), should weigh negatively on inflation in 2019. Indeed, the energy component of harmonized inflation at the level of the euro area represents around 10% of the overall index. With such a weight and given the second-round effects expected to affect the other components of the index, disinflationary pressures are expected to intensify in H2 2019.
Eurozone inflation remains high at the end of 2018 (HICP, YoY %)
The ECB's Quantitative Easing ends this month and there is no doubt that their monetary policy conduct will be scrutinized by the markets. If inflation decelerates in 2019, Mario Draghi will be unable to make a first rate rise before the end of his term scheduled for October 2019. If Jens Weidmann, the German hawk takes the queens of the Frankfurt-based institution, there is no doubt that key interest rates will not stay long at their current levels.
Julien Moussavi, Head of Economic Research
Sources: Beyond Ratings, Datastream