Inflation on the rise! Eurozone February CPI higher than expected, escalating tensions in Iran driving up risks. Market starting to price in ECB rate hikes.

The unexpected acceleration of inflation in the eurozone has supported the cautious attitude of the European Central Bank towards interest rates, especially in the situation of surging energy prices due to the Iran war. The eurozone's CPI rose by 1.9% year-on-year in February, higher than January's 1.7% and analysts' expectations of 1.7%. The core CPI, which excludes volatile food and energy prices, also unexpectedly accelerated to 2.4%, higher than the expected and previous value of 2.2%. In addition, Eurostat said on Tuesday that the inflation rate for the highly anticipated service sector rose to 3.4%. The overall inflation rate is mainly driven by Italy, where the inflation rate far exceeded expectations, reaching 1.6%. This is likely due to Italy hosting the Winter Olympics last month. Prices for food and accommodation services alone increased by 6.1%. European Central Bank policymakers are currently happy to maintain borrowing costs at 2%, believing that the inflation rate will rise to the target level and that the economies of the 21 countries in the region can sustain moderate growth. However, the intensification of the conflict in the Middle East has exacerbated existing risks, including US tariff increases, a strong euro, and the possibility of a large influx of cheap imports. Traders now believe that there is a 50% chance of a 25 basis point rate hike by the European Central Bank this year. Analysts point out that the uptick in eurozone inflation in February may be mainly due to the impact of the Milan Olympics, making it difficult to reflect potential price pressures. If commodity prices continue to rise, it could have a greater impact on economic prospects, with some analysts suggesting that this indicates an increased possibility of monetary easing policies, although financial markets hold different views on this. European Central Bank Chief Economist Philip Lane said on Tuesday that due to the military actions in Iran and its surrounding regions disrupting the oil and gas markets a factor that could exacerbate inflation the European Central Bank will "closely monitor developments." He cited a scenario previously simulated by the central bank, which showed that if energy supplies were disrupted due to the Middle East war, there would be a "substantial surge in energy-driven inflation and a sharp decline in output." Following the attacks by Iran, Qatar suspended production at the world's largest natural gas export facility, causing European natural gas prices to rise by over 70% since last Friday's close. The global benchmark Brent crude oil price soared by about 7% on Monday, further rising to over $80 per barrel. The duration of the conflict will determine the extent of the impact on inflation in Europe. Pierre Wunsch, Governor of the Belgian Central Bank, said on Monday that sustained high energy prices would also hinder economic expansion, and from a net basis perspective, an "oil shock" could exacerbate inflation. Wunsch said: "We know very little about the situation, so I will certainly not rush to react to any fluctuations in energy prices. If this situation continues for a longer period of time, if the increase in energy prices is greater, then we will have to run our models to see what will happen." The European Central Bank will update its quarterly forecasts at the next monetary policy meeting in less than three weeks. In December last year, the European Central Bank forecasted an inflation rate of 1.9% in the first quarter.