Central Europe may cut rates despite high inflation

Significance

Lower wholesale natural gas prices have improved balance-of-payments and fiscal positions and driven down inflation rates in Central Europe (CE). Financial markets are pricing in significant cuts in interest rates by year-end. Non-euro-area central banks are under pressure to start reducing borrowing costs as signs of disinflation become more pronounced.

Impacts

• The ECB will raise rates by 50 basis points in March; further moves are unclear and traders hoping for no more rises may be disappointed.
• The Brent crude oil price has been largely flat this year; it should trend gradually downwards, though it will be vulnerable to volatility. 
• The Stoxx 600 index gauge of European stocks has been on an upward trend since late September, outpacing the benchmark S&P 500 index.