February 24, 2024
Fall in euro zone inflation pits ECB against markets

  • Inflation stood at 2.4% in November vs 2.9% in October
  • Market bet on interest rate cut in April
  • Implicit price growth has also slowed down

FRANKFURT, Nov 30 (Reuters) – Euro zone inflation fell more than expected for the third consecutive month in November, challenging the European Central Bank’s narrative that price rises are stubborn and in defiance of the bank’s clear guidance on an early spring rate cut. Bets are being placed on.

Inflation has fallen sharply toward the ECB’s 2% target from levels above 10% a year ago, but policymakers have cautioned against excessive optimism. He warned that the “last mile” of deflation could be more difficult and take twice as long to get back below 3%.

Hard data showing a sharper-than-expected decline in inflation appears to challenge that view, however, there is still room for a rebound in the coming months as higher energy prices level out from year-ago figures and Some tax cuts have been reversed.

Consumer price growth in the 20 countries that share the euro currency fell to 2.4% in November from 2.9% in October, well below expectations of 2.7%, with almost all goods falling, with the notable exception of unprocessed food prices. .

Even as underlying price pressures eased more sharply than forecast, inflation excluding food and energy – closely monitored by the ECB – declined from 4.2% to 3.6% due to a large fall in services prices. .

The sharp inflation slowdown has put the euro zone’s central bank and investors on a collision course as they see very different paths forward for both consumer prices and ECB interest rates.

“With the apparently good inflation report in the third month, and prices actually declining over the past month, it is starting to look like we will soon be talking about inflation being too low rather than too high,” Kamil said Kovar, a senior economist at Moody’s Analytics.

“And if recent trends in inflation and growth continue then 2024 will be the year the ECB applies a cap on monetary policy.”

The ECB argues that the underlying dynamics are more stubborn than they appear and that inflation will actually rise above 3% next year, reaching the 2% target only at the end of 2025, partly due to faster nominal wage growth. .

This would require the bank to keep its deposit rate at a record-high 4% for an extended period, and even Greek central bank chief Yanis Stournaras doesn’t see any cuts before mid-2024. .

The latest figures on Thursday showed unemployment stood at a record low 6.5% despite the economic contraction, which appears to support this argument as it underlines how tight the euro zone labor market is.

Bank of Italy Governor Fabio Pennetta on Thursday stopped short of explicitly emphasizing the ECB’s guidance, but warned about the dangers of keeping interest rates high for too long.

“The duration of this phase will depend on developments in macroeconomic variables; it could be shorter if continued weakness in economic activity accelerates the decline in inflation,” said Panetta, a former ECB board member. “”We need to avoid unnecessary damage to economic activity.”

Investors are ignoring ECB Chair Christine Lagarde’s clear guidance of holding rates steady for several quarters, pricing in a combined 115 basis points of rate cuts for next year, with the first move by April.

A major reason for the discrepancy is that the ECB’s own projections have a poor track record. It has been forced to drop its guidance several times in recent years after falling short of market expectations.

Economists say growth is weaker than the ECB expected, the labor market is softening and credit demand has evaporated, all pointing to faster inflation.

“Furthermore, the impact of the tightening is still very high as interest payments are still rising,” said ING economist Bert Colligen. “So it is right for the market to consider a rate cut for 2024. We believe the first cut could happen before the summer.”

Some economists argue that modeling the current inflation is exceptionally difficult because corporate profits are the main driver, not wages, as is the case in normal periods of rapid inflation.

Reporting by Balázs Koranyi; Editing by Katherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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Source: www.reuters.com

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