Eurozone inflation "paves the way" for smaller 50-point rate hike

(Alliance News) - Eurozone inflation slowed by more than expected in November, a flash estimate from Eurostat revealed on Wednesday, giving the European Central Bank some breathing room ahead of its next policy meeting.

The consumer price index is estimated to have risen by 10.0% in November from a year before, slowing from a 10.6% increase in October, figures from the statistical office of the EU showed.

Market consensus cited by FXStreet had estimated a 10.4% annual inflation rate in November.

"While still extraordinarily high, it does offer hope that inflation may have peaked and the deceleration could be faster than anticipated, in much the same way it was on the way up," said Craig Erlam at Oanda.

October's inflation figure was a record high, fuelled by soaring food and energy costs in the wake of Russia's war in Ukraine.

This month's cooler-than-anticipated estimate "paves the way" for a 50 basis point hike from the ECB at their next meeting, according to analysts at Oxford Economics.

Brown Brothers Harriman agreed, saying that ECB tightening expectations have eased following the release of the data.

"[World Interest Rate Probabilities] suggests a 75 bp hike December 15 is less than 25% priced in, down from 45% at the start of this week and being fully priced in right after the October decision. Elsewhere, the swaps market is still pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision," BBH said.

"We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does," the analysts continued.

At its last meeting, the ECB raised the Frankfurt-based central bank lifted its key policy rates by 75 basis points, as expected.

It took the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility to 2.00%, 2.25% and 1.50%, respectively.

On Monday, ECB President Christine Lagarde said eurozone inflation is running at a record high and has not yet peaked. Her words signalled that further interest rate hikes were to come.

"I would like to see inflation having peaked in October but I'm afraid that I would not go as far as that," Lagarde told European lawmakers in Brussels.

"I think that there is too much uncertainty – particularly in one component which is the pass-through of high energy costs at wholesale level into retail level – to assume that inflation has actually reached its peak. It would surprise me."

Bert Colijn, senior economist at ING, agreed with Lagarde as he commented on Wednesday's flash figures: "Whether this is the peak in inflation remains to be seen. Another episode in the energy crisis could easily push inflation back up again and core inflation usually proves to be sticky after a supply shock."

However, Colijn admitted that there were "tentative" signs in Wednesday's data that inflation is peaking. As a result, he said it is "likely" to sway the ECB from 75 basis point hikes to a smaller hike of 50 basis point move in December.

The ECB has been hiking "at the fastest pace ever", Lagarde said on Monday, and added that more increases would be needed to bring inflation back down to the central bank's two-percent target.

"We still have a way to go and we're not done with inflation so, yes, we will continue to raise interest rates," Lagarde said.

In the aftermath of the data, the euro was "choppy" in the words of Oanda's Craig Erlam. However, at around 1430 GMT the single currency traded at USD1.0382, up slightly from USD1.0340 at the London equities close on Tuesday.

"While markets now view the possibility of a 50 or 75 basis points hike in December as a coin flip after previously heavily favouring the latter. That could be a positive for the euro if it means less of an economic slump, with the bloc already likely heading for recession," Erlam concluded.

The ECB's next monetary policy meeting is on December 15.

By Heather Rydings; [email protected]

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