Against a backdrop of slowing inflation and economic growth, the ECB is expected to hold fire
Inflation in the euro zone (EARN) is falling fast and the economy has started to contract, data showed on Tuesday, illustrating the double impact of interest rate hikes by the European Central Bank (ECB).
Prices rose just 2.9 percent in October, the slowest pace since July 2021 but still above the ECB's inflation target of 2 percent, Eurostat data showed. Figures also showed that the euro zone's economy shrank by 0.1% in the third quarter, pushing it closer to recession.
These two sets of data mean that the ECB is almost done raising rates and now needs to wait and see what happens before taking further action.
Dany Antonich, chief investment officer at Quintet Private Bank, said: "Against a backdrop of slowing inflation and economic growth, we expect interest rates to remain at current levels before cutting rates from the middle of next year."
Overnight, Greece (GRE) central bank governor Yannis Stournaras said that if inflation stabilizes below 3%, it may cut interest rates in the middle of next year. This is the first central banker to say so explicitly.
However, hawkish Bundesbank President Joachim Nagel did not rule out further rate hikes. Francois Villeroy de Gallo, the centrist governor of the Bank of France, said: "Interest rates should stay where they are."
Headline inflation began to fall sharply last month, largely because of a sharp rise in energy prices a year ago, which lifted the year-over-year base, but this effect will soon weaken or even reverse in future data.
Core inflation, which excludes energy, food, alcohol and tobacco, recorded a more modest decline, falling from 4.5 per cent to 4.2 per cent, the lowest level since July 2022.
While all components of the inflation basket increased from a month ago, the slowdown in services was small, falling from 4.7 per cent to 4.6 per cent.
"The ECB needs to see wage inflation slow, which could take another six months," said Mark Wall, an economist at Deutsche Bank.
The hardest mile to hit your inflation target
Judging by the ECB's own data, inflation will not return to the ECB's 2% target until 2025.
Dirk Schumacher, an economist at Natixis, said: "What is happening is that weak demand is leading to lower inflation, and it is a slow process."
In the process, GDP in more than 20 eurozone countries is expected to continue to shrink in the fourth quarter of this year.
Tuesday's data showed a 1.8 percent decline in Ireland's gross domestic product, which is volatile because it is often affected by revisions related to its large multinational sector.
Economists widely believe that this marks the beginning of a small recession in the eurozone economy, which could be exacerbated by the war in Ukraine and the Israeli-Palestinian conflict.
"It does look like the economic environment is deteriorating, but there is no sign of a serious recession," said ING economist Karin. However, ongoing economic and geopolitical uncertainty and the impact of higher interest rates on the economy will weigh on economic activity in coming quarters."
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