The European Central Bank is seen slowing down the pace of rate hikes, with a 50 basis point hike on Dec. 15 following weaker-than-expected inflation data for November in the euro zone.
Inflation in the euro zone rose 10 percent in the year to November, down from 10.6 percent in October and below economists’ consensus forecast of 10.4 percent, Eurostat said.
“While we are far from out of the woods, the current economic environment does seem likely to push the ECB to a modest 50 basis point hike in December,” said Bert Colijn, senior euro zone economist at ING Bank.
The European Central Bank raised interest rates by 75 basis points on October 27 amid accelerating inflation.But month-on-month inflation in the euro zone fell 0.1% in November, down from a 1.5% rise the previous month
However, given that core inflation is set at 5%, well above the 2.0% the ECB wants to achieve, the ECB can’t stop there yet. The data was in line with consensus expectations and unchanged from October.
As the chart shows, the rise in headline inflation in the euro area continues to be driven mainly by energy prices:
Food, alcohol and tobacco prices also contributed to higher headline inflation, but services inflation actually fell to 4.2% in November from 4.3% in October, suggesting that the pass-through of inflation in the euro area may not be as feared so serious.
“We should have heard some good news,” Colijn said. “Inflation in the euro zone is starting to come down after several unpleasant upward surprises.”
But looking ahead, the ING analyst warned that inflation in the euro zone may not necessarily peak. Meanwhile, economists at UniCredit said euro zone inflation should decelerate rapidly in 2023.
Eurozone inflation expectations are as follows:
UniCredit expects inflation in the euro zone to remain above 10% year-on-year until the end of the year before entering a downward trend, reaching 2.5% by the end of 2023 and 2% by mid-2024.
The ECB estimates that around half of core inflation is due to supply-side factors. UniCredit analyst Marco Valli said core inflation could also be adjusted downward as these factors fade and demand falls. According to him, there are reasons for the ECB to consider slowing down the pace of rate hikes. Stabilizing core interest rates is a key consideration for the central bank, he said.
“In our view, there are two main conditions that must be met before the central bank will stop raising rates: 1. Evidence of a peak in core inflation; and 2. Unemployment starting to rise,” Valli said.
“We expect both conditions to be met sometime in the second or third quarter of next year,” he added.
UniCredit expects the ECB rate to peak at 2.75%, with 50 basis points hikes in December and February and a final 25 basis point hike in March.
EUR/USD daily chart
At 8:43 on December 1st, Beijing time, the euro traded at 1.0431/32 against the U.S. dollar