Eurozone inflation has defied expectations again, giving the European Central Bank (ECB) yet another reason to drag its feet on interest rate cuts. According to Eurostat, consumer prices rose 2% in October from a year earlier, up from 1.7% in September, beating analysts’ hopes for a modest 1.9% rise. Though slightly less of a drag than before, energy costs still played a starring role in the inflation drama. Meanwhile, core inflation—excluding volatile items like food and energy—stubbornly held steady at 2.7%, confounding forecasts.
These figures give the ECB hawks yet more ammunition to fend off any hasty rate cuts to prop up the region’s sluggish economy. Investors have already cooled their hopes for a deeper rate reduction to close out 2024, especially after Wednesday’s growth data showed the euro area on firmer ground, with Germany somehow dodging the recession bullet.
ECB board member Isabelle Schnabel advocated for a “gradual” approach to monetary easing, while Bundesbank President Joachim Nagel added his cautionary voice, urging against any rush to cut. His comments came from the German inflation data, which was much hotter than expected, climbing to 2.4% in October from 1.8% in September.
President Christine Lagarde chimed in, warning that while the inflation target might be within sight, “we’re not out of the woods yet.” She candidly admitted in an interview with Le Monde, “We know inflation will tick up in the coming months due to base effects.” And then there’s the risk of surging energy costs should conflicts in the Middle East or Ukraine intensify, not to mention the possibility of Donald Trump returning to the White House with his tariff-happy approach to trade.
In Europe, rising wages drive inflation in the services sector, which showed no signs of cooling in October with a 3.9% price rise. The ECB’s outlook? According to Bloomberg Economics, they still see another rate cut in December, likely bringing the deposit rate down to 3%. After that, expect a slow, cautious quarterly cadence as policymakers inch toward a “neutral” rate. Markets are betting on successive cuts next year, with an end target of around 2%.
Europe may well continue to muddle through with this gradual rate reduction. Still, with inflation and uncertainty hanging in the balance, it’s safe to say the ECB’s cautious approach isn’t going anywhere soon.