The European Central Bank is already in the process of cutting interest rates and its credibility will be tested again in the coming months, at a time when the organization needs energy prices not to continue their rise. . The ECB, through its president, Christine Lagarde, has warned in recent months of a temporary rebound in inflation derived from the seasonal effect of energy prices in the CPI basket. The problem is that, since Lagarde launched this warning at the end of October 2024, the signals that the energy market is sending are not positive, and everything indicates that the inflationary pressures that were expected to be punctual are going to lengthen over timeand may even last for almost the entire year 2025. This could be a hard blow for the central bank, and also for the fixed income market, which is already suffering from the fear that the inflationary rebound will prevent the Fed and the ECB lower rates as much as expected.
At the October 2024 meeting Christine Lagarde sent a message of calm after warning of a new increase in inflationary pressures in the euro zone. The president of the ECB warned that in the coming months there would be an inflationary rebound “derived from the base effect of energy prices”, but she also calmed her interlocutors by assuring that it would be a “punctual” rebound, and that in Shortly there would be declines in inflation growth in the euro zone again.
Lagarde’s warning is explained by the way inflation is measured: broadly speaking, the price basket calculates, in the interannual case, the change that has occurred between the price of one of its components, and the one it maintained in the same time last year. Therefore, if energy raw materials, such as oil or gas, remained below the prices of the previous year, even if they remained stable or even increased from one month to the next, they could continue to be a source of disinflationary pressure. Likewise, if they traded above prices at the same time the previous year, they would be an element that would contribute to inflation. This is what is happening now, and most worryingly for the ECB: this is what looks like it will happen for most of this year.
A rise in inflation is a thorn in the side of the ECB at the moment. Firstly, because it distances the fulfillment of its objective, which is to ensure that inflation growth moderates to 2% year-on-year, but, above all, It is a danger for the central bank due to the impact it can have on its credibility.after the organization assured that the situation is on the right track and that the increases in recent months would be anecdotal and short-lived. Already in the last inflationary surge, in 2022, large central banks such as the ECB or the Fed suffered a loss of credibility as they were not able to correctly foresee the magnitude of the increase in inflation at that time.
Electricity increases will create inflation
The electricity market is one of the main inflationary sources to which an economy is exposed. Energy has a key impact on the production prices of many goods and services, and therefore, when you pay more, it affects the prices that consumers end up paying. That is why it is so important to maintain low and stable prices in the electricity market to prevent an inflationary spike.
Looking ahead to 2025, analysts believe that the electricity market will be a source of inflationary pressureone of the scenarios that the ECB would have wanted to avoid at all costs, and which runs the risk of punishing the credibility of the central bank, which, to date, continues to expect a temporary rebound in inflation due to the base effect of commodity prices. energy, but not an increase that can last throughout the year.
The estimates for electricity in Germany are 92 euros/MWh in the first quarter, 77.8 euros in the second, 90.6 in the third and 104.26 in the fourth, figures that exceed, in all cases, the prices at which electricity moved in 2024: 63 euros in the first quarter, 67 in the second, 76 in the third and 99 in the fourth.
For the Spanish market, this situation is repeated, which promises energy inflation throughout 2025: if in the first and second quarters of 2024 the average prices were 38.9 and 33.5 euros/MWh, and in the third and fourth it was 78 .9 and 94.7 euros, by 2025 analysts expect quarterly prices of 82.9 euros, 51.3 in the first two quarters, and 82.6 for the third. For the fourth, no forecasts have yet been released by the consensus of analysts collected by Bloomberg.
Natural gas is the main inflationary ingredient
Behind the megawatt price increases expected for 2025 there is a particularly important component for the formation of electricity prices in the Old Continent: natural gas. The raw material has been one of the components that has most affected electricity prices in Spain in recent years.due to the weight it gains in the Iberian price formation system when renewable sources do not generate much electricity. When there is no wind and there is little photovoltaic generation, there are times when the price is set by gas, and the increases in the price of the energy resource that are occurring threaten to once again turn gas into an inflationary source in the euro zone. .
The problem for central banks is that, if everything goes as expected, in 2025 natural gas will be inflationary throughout the year, a clear sign of danger that could destroy the central bank’s hopes that the rebounds in Prices are only a short-term issue. The consensus of analysts that collects Bloomberg It indicates that the prices of the energy raw material will move around $48 during the first three quarters of 2025, and around $46 in the last one. These prices, in all cases, will be enough to create year-on-year inflation throughout the year, after a year 2024 in which prices have remained below $45 almost at all times.
The fall in gas inventory levels in the eurozone is responsible for the price increases that have occurred in recent months, and for a rumor that points to further price increases in gas in the eurozone. short term. For the first time since the Ukrainian war began, Europe is risking not meeting its targets for gas inventory levels for next winter: the amount of raw material currently in storage has fallen below the average of the last five years for the first time since the war began.
Although it does not seem that there will be supply problems for this winter, there is some fear that there will be a shortage for next year, and this is already being noticed in the prices paid now in the financial markets. Gas in Europe is being paid at 46.7 euros/MWh, in the midst of an international race to ensure gas supply for the winter. Russian gas no longer reaches Europe through Ukraine, after the end of the transport agreement that was in force until the last quarter of 2024, and from now on European buyers will have to compete with those from the rest of the world for a pie smaller, and try to get the most viable alternative: liquefied natural gas (LNG), which is transported by ships from the United States and other parts of the world.
In fact, the arrival of Donald Trump to the US presidency may confirm an increase in purchases of US gas by the euro zone, since the new president has threatened the Old Continent with new tariffs if energy imports are not increased. US. Now, it must be remembered that if, as Trump has promised, the conflict in Ukraine is put to an end, there is a possibility that the gas markets will calm down and there will be falls in the prices of the raw material that will prevent central banks will have to deal with a new rise in inflation in the coming months.
Of course, several experts highlight Bloomberg how the increase in gas prices, due to the need to replenish inventories for this winter, will not be a reality that lasts for a long time, beyond 2025. Firms such as Jefferies or Rabobank believe that a strong increase will arrive in 2026 of natural gas supply, which will help prices remain at moderate levels, and the agency highlights how, starting in 2030, a new wave of liquefied natural gas will arrive, especially originating in United States and Qatar.
LinkedinBeloud
#Energy #opens #inflationary #front #threatens #central #banks #fixed #income
