Lower inflation raises hope ECB will slow pace of interest rate hikes

ECB president Christine Lagarde had told the European Parliament that “it would surprise me” if price growth has peaked.
Lower inflation raises hope ECB will slow pace of interest rate hikes

The European Central Bank first started raising official rates this year in July and is widely expected to hike again later in December. 

A sharp slowdown in inflation across the eurozone, including in Ireland, has resparked the debate about whether the European Central Bank will slow the pace of its interest rate hikes in December and into 2023.

November's eurozone annual inflation of 10% was down from 10.6% in October, reflecting the slowdown in readings in major economies including in Germany, according to Eurostat figures.

Irish inflation also fell, to 9% from 9.4% in the previous month, according to the Eurostat harmonised data that help the task of making comparisons across the euorozone easier.  

Like other central banks around the world, the ECB started this year by increasing interest rates in its campaign to try to get a grip on inflation and to prevent price pressures of energy and food caused by the Ukraine war from spilling out across the whole of the European economy. 

It first started raising official rates this year in July and is widely expected to hike again later in December. The latest Eurostat reading has raised hopes that eurozone inflation has peaked and that the ECB will slow the pace and end raising at an early stage next year. 

However, Andrew Kenningham, chief Europe economist at Capital Economics, said it still expects the ECB to hike in December, by half a point or by 75 basis points, because it predicts so-called core inflation, which excludes energy prices, will remain at elevated levels in 2023.  

"However, there is little doubt that headline inflation will fall rapidly next year; our forecast is 2.5% for December 2023. In contrast, core inflation is likely to remain well above the ECB’s 2% inflation target as underlying price pressures stay strong and businesses pass on higher energy costs and wages," Mr Kenningham said. 

While only a single month of data, the flickering prospect of weakening price pressures will bring relief to the ECB after the frustration of half a year of figures repeatedly exceeding economist forecasts. 

It coincides with US statistics from October that went in the same direction, emboldening some Federal Reserve officials to consider a downshift in the pace of rate hikes. 

“This will be welcome news for the ECB and reinforces our view that the pace of rate hikes will slow in December to 50 basis points from 75," said Maeva Cousin, senior economist at Bloomberg Economics. "Any sense of relief will be tempered by the fact that underlying pressures remain way too strong.”  

The eurozone inflation rate remained in double digits for a second month, and officials this week sought to warn of possible false dawns. ECB president Christine Lagarde had told the European Parliament that “it would surprise me” if price growth has peaked.

Her deputy, Luis de Guindos, lamented earlier this month about prior “negative surprises”. And earlier this week, he emphasised that “the signal we have to keep following is the evolution of underlying inflation”.  

The vice president may have been referring to the so-called core measure, which strips out volatile elements such as food and energy. That gauge was unchanged at a record 5% in the latest Eurostat reading. 

The numbers follow a string of weaker consumer-price readings from around the eurozone this week. Inflation moderated in Germany, Italy, Spain and the Netherlands. In France, it unexpectedly held steady. Price growth only accelerated in three eurozone nations. 

Whether a lower inflation number will be enough to nudge the ECB toward only a half-point increase isn’t clear. 

Additional reporting Bloomberg

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