Euro Zone Inflation Cools to 2.4% in November, Fueling Expectations of ECB Rate Cuts

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Euro Zone Inflation Cools to 2.4% in November, Fueling Expectations for ECB Rate Cuts

Annual inflation in the euro zone cooled to 2.4% in November from 2.9% in October, according to flash figures released on Thursday. This was well below economists’ expectations of 2.7%, providing fuel for expectations of European Central Bank (ECB) rate cuts.

Core inflation, a measure closely-watched by the ECB that excludes the volatile effects of energy, food, alcohol, and tobacco, also came in lower than expected, dropping to 3.6% from 4.2% in October.

Energy prices continued to log significant year-on-year declines, coming in at -11.5% in November, while food, alcohol, and tobacco contributed the biggest pull higher at 6.9%.

Headline inflation has now cooled significantly from the peak levels of 10.6% in October 2022. Inflation in the euro zone’s largest economies, Germany and France, has dropped to 2.3% and 3.8%, respectively.

ECB officials have repeatedly stressed that it is too early to declare victory over price rises in the 20-member euro zone bloc, as they monitor potential pressures from wage increases and energy markets.

Mathieu Savary, chief European strategist at BCA Research, said that traders would now be tempted to bring forward expectations for the timeline of the first ECB rate cut, but argued that the central bank’s concerns over labor market tightness continued to imply “later rather than sooner rate cuts.”

Separate data released by statistics agency Eurostat on Thursday showed that unemployment in the euro area remained at a record low of 6.5% in October, despite a contraction in the euro zone economy in the third quarter.

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“For the ECB, signs of an imminent victory on inflation are mounting,” Bert Colijn, senior euro zone economist at ING, said in a note, adding that some of the impact from existing monetary tightening was yet to be felt.

“The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer,” Colijn said.

Overall, the cooling inflation figures are likely to increase pressure on the ECB to consider rate cuts in the coming year.

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