Hawkish ECB adding to the periphery's troubles

March’s pick-up in euro-zone CPI inflation from 2.4% to 2.6%, combined with signs that pipeline price pressures may be building, has led markets to become increasingly convinced that April’s likely interest rate hike will be one of a series. In response, the euro has continued to climb, increasing the chance that the external recovery will slow before too long, especially in the uncompetitive periphery. With business and consumer sentiment recently falling in the periphery (see Chart), it seems increasingly inevitable that these economies will fall back into or deeper into recession. Accordingly, fears of future euro-zone government debt restructurings look set to continue to grow.