FX.co ★ ECB to stay on course with rate cuts despite rising inflation

A fresh wave of inflation is unlikely to sway the European Central Bank or change its stance on cutting interest rates. According to Bloomberg, eurozone inflation surpassed the ECB’s 2% target in November, but this will hardly deter the regulator from continuing its rate-cutting path. Policymakers are committed to their current course and plan to maintain it in the coming months and beyond.

Eurozone consumer prices rose to 2.3% year-on-year in November, up from 2% in October. That was in line with the median forecast of analysts surveyed by Bloomberg. The spike in inflation stemmed from so-called base effects in the EU's energy sector. Meanwhile, the cost of services remained elevated. According to Eurostat, prices for industrial goods, excluding energy, accelerated for the second consecutive month.

Core inflation, which excludes volatile food and energy prices, remained steady at 2.7%. This indicator is closely watched by ECB officials to respond quickly and guide future monetary policy. The regulator is widely expected to cut rates by 25 basis points at its next meeting in December.

Against this backdrop, ECB proponents of a dovish stance such as Yannis Stournaras from Greece and Mario Centeno from Portugal are concerned about the prolonged weakness of the European economy. They believe that the current situation will prevent inflation from returning to the central bank’s 2% target. This has intensified calls for a swift reduction in the deposit rate from the current 3.25% to 2%, a level considered neutral, neither restricting nor stimulating growth.

Bank of France Governor Francois Villeroy de Galhau has pointed out that the ECB will have to lower borrowing costs to a level that encourages inflation to rise. His Italian counterpart, Fabio Panetta, echoes the same view.

In this environment, investors are exercising caution and are not in a hurry to commit funds. As a result, medium-term inflation expectations have fallen below 2% for the first time since 2022.