Greece’s harmonised consumer price index rose to 4.9% year on year in May, up from 4.6% previously. The increase points to a modest acceleration in HICP inflation over the month.
The latest reading keeps annual price growth elevated and shows that disinflation has not been smooth. The May uptick follows the prior 4.6% rate and leaves inflation close to 5% on a harmonised basis.
Implications For Interest Rate Expectations And Derivatives Markets
We see that Greek harmonized inflation accelerated to 4.9% in May from 4.6% previously. This uptick suggests that price pressures are not fading as hoped and are proving to be persistent. This challenges the narrative that the European Central Bank (ECB) can comfortably consider easing its monetary policy soon.
Given this data, we believe the market may be underpricing the risk that the ECB will hold interest rates higher for longer. Eurozone-wide inflation also recently ticked up to 3.1%, and this Greek figure reinforces the sticky inflation theme. Therefore, derivatives pricing that has factored in a rate cut by the end of the year could see an unwinding.
This environment makes positions that bet against falling interest rates more attractive. We are looking at interest rate swaps and futures on EURIBOR that would profit if the central bank delays any planned cuts into 2027. The probability of a rate cut this year, which stood near 60% just last month, could fall significantly on news like this.
Impact On Government Bonds And Greek Equities
For government debt, this inflation print is negative for Greek bond prices and we expect yields to climb. The spread between Greek 10-year bonds and German Bunds, which has tightened to around 125 basis points, is likely to widen as investors demand a higher premium. We see an opportunity in buying put options on Greek government bond futures.
On the equity side, persistent inflation can erode corporate margins and dampen consumer demand, creating a headwind for the Athens Stock Exchange. Historically, periods of unexpectedly high inflation lead to increased market volatility. This makes buying protective puts on the ASE General Index or establishing volatility-positive positions like straddles a prudent strategy for the next few weeks.
