Eurozone November inflation accelerated as expected, adding new reasons for cautious interest rate cuts

According to the Zhitong Finance APP, data released on Friday showed that inflation in the Eurozone accelerated in November, and the most closely watched inflation sub-index remains high, increasing the rationale for a more cautious interest rate cut by the European Central Bank next month.

According to data from Eurostat, in November, the consumer price inflation rate in the 20 countries of the Eurozone was 2.3%. This is higher than the 2.0% from a month ago and the European Central Bank's target of 2%, but in line with expectations.

Meanwhile, the underlying inflation that the European Central Bank primarily focuses on when setting interest rates stabilized at 2.7%, as a slight slowdown in service costs was offset by rising goods inflation.

As the largest single item in the consumer price basket, service prices have hovered around 4% over the past year, slowing from 4.0% to 3.9% this month.

Service prices are often above the overall average, but policymakers believe that the drag from energy and imported goods will fade over time, making a figure close to 3% desirable.

However, Friday's data did not change the overall situation, which indicates that inflation will gradually fall back to the European Central Bank's target on a more persistent basis next year, thus further lowering the deposit rate from 3.25% remains necessary.

The key question now is whether a 25 basis point rate cut on December 12 will be sufficient, or whether a larger cut of 50 basis points should be chosen.

Those supporting a 25 basis point cut argue that service prices remain high enough to cause concern, while wages continue to grow rapidly, supported by record-low unemployment rates. Even if the growth rate is low, it aligns with the idea of a "soft landing," which has always been the European Central Bank's goal.

Hawks like Bundesbank President Joachim Nagel have called for caution, warning against rushing into further rate cuts due to service sector inflation, rising wages, and significant geopolitical uncertainty.

Executive Board member Isabel Schnabel even stated this week that borrowing costs are already close to neutral levels, and it currently seems inappropriate to lower rates to stimulate the economy.

Meanwhile, those advocating for a larger rate cut argue that the economy has not yet fallen into recession, thus larger-scale stimulus measures are needed to protect jobs, as an increase in layoffs will suppress already weak demand, leading to more layoffs and creating a self-reinforcing cycle.

More dovish policymakers at the European Central Bank, such as Bank of Greece Governor Yannis Stournaras and Bank of Portugal Governor Mario Centeno, are concerned that a weak European economy could lead to inflation falling below the 2% target They strongly urge a swift reduction of the current 3.25% deposit rate to 2%—which they believe is a neutral level that neither restricts nor stimulates economic growth.

Francois Villeroy de Galhau, the Governor of the Bank of France, stated on Thursday that the European Central Bank may need to lower borrowing costs to an expansionary level to promote growth, echoing recent comments from Fabio Panetta, the Governor of the Bank of Italy.

Investors also seem to share similar concerns: a key market indicator measuring medium-term inflation expectations fell below 2% this week, the first time since 2022.

However, although this debate is unlikely to be resolved before policymakers receive the European Central Bank's new economic forecasts ahead of the meeting on December 12, even recently dovish officials have presented some reasons for gradual rate cuts, suggesting they may agree to a 25 basis point reduction.

The European Central Bank's new forecasts for economic growth and prices in December will be crucial in determining the extent of policy easing. While some officials believe that a 2% inflation rate will be reached by early 2025, recent predictions from the European Commission suggest it will take longer.

Another reason is the necessity to retain some policy space before the new U.S. government takes office and its policy ideas become actual policies, as these measures could have significant impacts on the global economy.

Trump's return adds uncertainty. While most European Central Bank policymakers believe that trade tariffs will weaken economic growth in Europe, the impact on prices remains unclear. President Lagarde stated this week that "trade wars may bring a bit of net inflation in the short term."

Currently, the market has fully digested expectations for a slight rate cut, believing the likelihood of a further 50 basis point reduction is less than 10%. However, market expectations have been unstable, with this probability once approaching 50% after a particularly weak business survey last week.

Regardless of the outcome on December 12, investors are betting that the European Central Bank will steadily cut rates, expecting policy easing at every meeting at least until June next year. By the end of 2025, the deposit rate is expected to drop to 1.75%, a level low enough to stimulate economic growth again