By Joshua Kirby
Inflation rose above the European Central Bank's target in the eurozone this month, though likely not enough to deter policymakers from cutting interest rates for a third straight meeting next month.
Consumer prices were 2.3% higher than a year earlier in November, accelerating from October, European Union figures showed Friday.
The ECB's economists expect inflation to fall back to the central bank's target next year, but policymakers remain concerned about big rises in services prices. Services inflation inched down in November, but likely remains too strong for the comfort of rate setters.
"For a sustainable decline of inflation to our 2% target, we need to see services inflation come down," ECB executive board member Isabel Schnabel said this week.
The pickup in the inflation rate in November could make the central bank's policymakers reluctant to move more aggressively to lower borrowing costs. But with the eurozone economy struggling to get any wind in its sails, investors are betting that a cut to interest rates remains the most likely outcome at December's policy meeting.
The bank this year set out on a path of gradually lowering interest rates toward their neutral point, or the level at which they no longer act as a braking force on investment and economic activity. That level is held by policymakers to be between 2% and 3%, compared with the current 3.25% deposit rate. Still, some eurozone central bankers have suggested the ECB may need to bring rates below neutral in order to encourage activity, though that would risk bringing about a fresh spike in inflation.
The bank should keep its options open as to the size of December's rate reduction, Bank of France Governor Francois Villeroy de Galhau said in a speech in Paris on Thursday, suggesting the possibility of a stronger cut of half a point, rather than a quarter. Undershooting inflation remains a danger for the eurozone, Villeroy said.
"The European economy is achieving a soft landing, but a take-off is not yet in sight," he said.
A fall in services prices ahead should drive the bank to cut rates more than markets currently expect, said Jack Allen-Reynolds, an economist covering the eurozone at Capital Economics.
"Bigger cuts will be on the cards sooner or later," he said in a note to investors.
Pressures on growth in the eurozone include the threat of a trade conflict with the U.S. following the election of former president Donald Trump to a second term in the White House. Whether tariffs will be applied to European imports, and of what stripe, remains uncertain and their eventual effects a matter of debate.
Fluctuations in energy prices saw inflation run above target in major eurozone economies including Germany and Spain this month. But in France, prices rose below 2% for a third straight month as its economy sputters.
Some ECB rate setters, including Villeroy, don't expect tariffs to have a major impact on prices in Europe. But the bank's president Christine Lagarde has warned a trade war is likely, if anything, to cause a slight upward impact on inflation in the near term.
"But you could argue both ways; it depends what the tariffs are, what they are applied on and over what period of time," she told the Financial Times in an interview published this week.
Most investors are expecting the ECB to cut rates by a quarter point next month, according to LSEG Refinitiv data. A minority, however, anticipate a bolder half-point cut against a backdrop of rising tariff threats and disappointing business surveys set out last week. Those surveys suggested activity is stagnating in the eurozone and that firms, fearing a chill on their business from an icier global trade background, are shedding staff, fuelling concern the 20-member currency union could slide into a winter recession.
Monetary policy should indeed avoid choking off activity, ECB chief economist Philip Lane said this week.
"Otherwise, the economy will not grow sufficiently and inflation will, I believe, fall below the target," he said in an interview with French daily Les Echos.
Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
(END) Dow Jones Newswires
11-29-24 0546ET
