Eurozone inflation edged up to 2.2% in November, contrary to market expectations. This indirectly reinforced the view that the European Central Bank will not rush to cut interest rates. Inflation remained close to its 2% target throughout the year, with lower energy prices helping to offset domestic price pressures, especially in services.
Core inflation remained at 2.4%, driven by rising service costs, while durable goods showed slower price growth. The data supports the ECB’s view that inflation is now under control and policymakers have time to assess economic developments without the need for immediate easing.
Markets are now pricing in a near-zero chance of a rate cut at the ECB’s December 18 meeting, and only a 25% chance of an easing in 2025. The ECB previously cut rates by 200 basis points until June, and has kept rates on hold since then.
While inflation is expected to fall below its target next year due to falling energy prices, the ECB sees this as a temporary aberration. However, there are concerns that too low an inflation reading could potentially undermine price expectations. Much lower gas and oil prices suggest that the energy deflation trend is still ongoing.
In terms of growth, the eurozone economy is showing signs of modest expansion of around 1% to 1.5%, supported by a tight labor market. The unemployment rate edged up to 6.4%, but overall economic data remains positive enough to maintain policymakers’ confidence that the economy is on a stable path.
