Eurozone inflation picks up, bolstering case for caution in rate cuts
EUROZONE inflation accelerated more than expected in October and could still pick up further in the coming months, bolstering the case for caution in European Central Bank interest rate cuts as price growth is not yet fully tamed.
Inflation in the 20 countries sharing the euro currency accelerated to 2 per cent from 1.7 per cent in September mostly on higher food and energy costs, coming above expectations for 1.9 per cent in a Reuters poll of economists.
A more closely watched figure which strips out volatile food and energy prices meanwhile held steady at 2.7 per cent, above forecasts for 2.6 per cent, Eurostat said on Thursday (Oct 31).
Inflation has fallen quickly since hitting double digit territory two years ago and most economists see it back at the European Central Bank’s 2 per cent target basis sometime in the first half of next year after some volatility in the final months of 2024.
This relatively quick return to target has also fuelled a debate in recent weeks, with some ECB officials arguing there was a growing risk that price growth will actually fall below target and the ECB will have to start stimulating growth to prevent excessively low inflation.
Such a dim outlook could even force the ECB to accelerate the pace of rate cuts and bolster the case for a bigger than usual step in December, some said.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
This argument has yet to gain significant traction, however, and conservatives, or policy hawks in central bank-speak, have pushed back, arguing for measured, incremental steps because a long list of factors could still push prices higher.
A key concern is that inflation in services, the biggest single item in the consumer price basket remains way too fast, holding steady at 3.9 per cent.
Wage growth is also faster than the 3 per cent rate the ECB considers consistent with its target and households are sitting on ample savings, which could bolster consumer savings and overall growth.
SEE ALSO
The labour market also remains tight with the jobless rate holding steady at an all-time low of 6.3 per cent in September, separate Eurostat data showed on Thursday.
The policy doves’ argument that overall growth is simply too weak to sustain 2 per cent inflation was also dealt a blow this week when fresh data showed the economy expanding at 0.4 per cent in the third quarter, twice as fast as expected, with Germany, France and Spain all showing surprising resilience.
But economists also appear to agree that no meaningful rebound in growth was likely and the eurozone will continue to grow at a lukewarm pace, below what is considered its potential.
That is why further ECB rate cuts are almost assured and no policymaker has challenged the need to move again on Dec 12, suggesting that the step is largely a done deal, unless major data surprises alter the outlook.
Financial investors are now betting that the ECB’s 3.25 per cent deposit rate could dip to 2 per cent or possibly below that by the end of 2025.
The biggest uncertainty, however, is likely to be the US election, policymakers say, since it could have far reaching implications for trade, growth and inflation which may require policy action further down the road. REUTERS
Share with us your feedback on BT's products and services
