LONDON(Reuters) – A surprisingly large rise in underlying price pressures in the euro zone in February reinforced the case for the European Central Bank to keep raising interest rates, nudging bond yields higher and keeping the euro near one-week highs on Thursday.

Inflation across the 20 countries that use the euro rose by at 8.5% in February, down from 8.6% the month before, Eurostat data showed.

A decline in energy prices helped ease headline inflation but a core measure of price pressures – an indicator watched closely by the ECB – rose by 5.6%, well above expectations for a rise of 5.3%.

MARKET REACTION:

STOCKS: The pan-regional STOXX 600 cut losses and was last down 0.2% on the day.

FOREX: The euro was last down 0.4% at $1.0628, but near Wednesday’s one-week highs. Against sterling, the euro rose 0.1% to 88.71 pence.

BONDS: German two-year yields were last flat on the day at 3.2027%, compared with 3.223% ahead of the data.

COMMENTS:

MARCO VAILATI, HEAD OF RESEARCH AND INVESTMENTS, CASSA LOMBARDA, MILAN:

“The core figure is going to strengthen the ECB hawks. The components like food, alcohol, non-energy products and services especially are growing further. This will strengthen the claims of austerity within the central bank’s council.

“Obviously it only makes the evolution of financial conditions less rosy. The economic environment for companies becomes less simple and margins are eroded, this makes the high level of stock prices even more vulnerable.”

PIET CHRISTIANSEN, CHIEF ANALYST, DANSKE BANK, COPENHAGEN:

“I don’t see any good things in this report for the ECB.

“It’s just a bad reading for the ECB looking at the various underlying inflation measures.

“That means that 50 bps (interest rate hike) is in place for May.

“It’s simply too strong still. Inflation will naturally eventually come down, but doesn’t seem as fast as otherwise anticipated.”

GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:

“High inflation means more aggressive ECB rates, which means less conducive business conditions for European companies.

“Rate expectations have been increasing throughout all of February and they continue to go up, which is what we’re seeing in the 10-year bond yields and the two-year yields as well.

“So what that’s telling you is that interest rate expectations are taking another notch up and there’s no relief in Europe. So the fact that Europe’s also experiencing high inflation, is no particular reason for optimism.”

JACK ALLEN-REYNOLDS, DEPUTY CHIEF EURO-ZONE ECONOMIST, CAPITAL ECONOMICS, LONDON:

    “February’s increase in core inflation will reinforce ECB policymakers’ conviction that significant rate increases are needed. For some time we have been forecasting a 50bp hike at the meeting in two weeks’ time and another in May, but further hikes at later meetings now look increasingly likely.

    “Looking ahead, core inflation is likely to come down only gradually this year. Admittedly, signs of goods disinflation are everywhere apart from the HICP data, so we would expect core goods inflation to start falling soon. But the labour market remains exceptionally tight – other data published this morning showed that the region’s unemployment rate was unchanged at 6.7% in January, and the surveys point to continued gains in employment.

    “That should keep services inflation, which accounts for nearly two-thirds of core inflation, very strong.”

BEN LAIDLER, GLOBAL MARKETS STRATEGIST, ETORO, LONDON:

“Inflation was clearly worse than forecast but maybe not as bad as feared given expectations had shifted following national data in the last few days.

“It’s more evidence of sticky inflation that we’ve seen globally over the last few weeks and it’s clearly new ammunition for rising bond yields and rising central bank rate hike expectations.

“I think the base case is the ECB keeps on at a 50 basis point hike pace, which would still be pretty hawkish. The ECB and the Fed will be more likely to keep rates higher than re-accelerate the pace of rate hikes.”

JOHN LEIPER, CHIEF INVESTMENT OFFICER AT TITAN ASSET MANAGEMENT, LONDON:

“Another bumper inflation number with eurozone inflation coming in above the prior reading and expectations for February, plus a slight pick-up in unemployment. This feeds into Christine Lagarde’s prior hawkish rhetoric and the evolving shift in market sentiment… rates will remain higher for longer. This is bearish for risk assets and we retain our conviction that equities are vulnerable at current valuations.”

ANDERS SVENDSEN, CHIEF ANALYST, NORDEA, COPENHAGEN:

“Euro-area core inflation increases again and increases worries about the stickiness of inflation. Even more concerningly, the rise in core came from services. Focus will be on wages for the ECB in the coming months.”

(Reporting by the London Markets Team; Editing by Dhara Rhanasinge and Amanda Cooper)

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