Euro-Zone Inflation Seen Back at Mid-2021 Low May Reassure ECB

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Euro-zone inflation probably slowed this month to the weakest since July 2021, reassuring officials who want to see if their tighter monetary policy is working.

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Consumer prices rose 2.7% in November from a year earlier, according to the median of 31 forecasts in a Bloomberg survey of economists. Underlying inflation, stripping out volatile elements such as energy, is also expected to have weakened again too.

Those numbers next Thursday will be the final glimpse for the region before the European Central Bank’s Dec. 14 decision, when officials armed with new projections stretching as far as 2026 will probably keep interest rates on hold for a second straight meeting.

President Christine Lagarde said on Friday that policymakers can now “observe very attentively” as they judge how long to keep borrowing costs high — and decide whether the next move is “up or down.”

While they aim to get inflation to 2%, the measure they watch most closely is the so-called core gauge. That’s currently higher but also slowing. Economists anticipate an outcome of 3.9%, the weakest in about 1 1/2 years.

Policymakers have warned that there may be a temporary rebound in inflation in coming months because the effects of annual comparisons in the data, though the prevailing direction is downwards.

The data will arrive after a series of national numbers on Wednesday and Thursday that are mostly expected to show a synchronized decline across major economies, albeit at divergent levels.

While Spanish inflation probably accelerated, it’s seen weakening in France to 4.1%, and the outcome in Germany is also projected lower at 2.6%.

Italian price increases are expected by economists to decelerate markedly further below the ECB’s goal to 1.1%.

Already in October, the inflation rate there was the third-lowest in the euro area after Belgium and the Netherlands, which both experienced outright declines. Given how Italian politicians frequently criticize the ECB, it’s plausible that such numbers could start the ball rolling on calls for rate cuts.

What Bloomberg Economics Says…

“With inflation due to rebound in December on the back of base effects from German energy subsidies, we expect the central bank will remain cautious for now about discussing possible rate cuts.”

For EMEA Week Ahead, click here

With investors already pricing in bets for reductions in borrowing costs in the first half of next year, the central bank has been at pains to insist that, having only just reached 4% in September, there’s no prospect of an imminent reduction.

“The battle is not over and we’re certainly not declaring victory,” Lagarde said on Friday.

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