Eurozone inflation rose in November, while key components remained high, data showed on Friday, strengthening the case for a more cautious approach to the European Central Bank's (ECB) interest rate cut next month.
Consumer price inflation in the 20 countries that use the euro stood at 2.3% in November, data from Eurostat showed. This was up from 2.0% the previous month and above the ECB's 2% target, but in line with expectations.
The rise in inflation was largely due to a statistical base effect, as unusually low figures from last year were removed from the time series and replaced by still modest but slightly higher figures, leading to a 0.3% monthly fall in prices.
Core inflation, which the ECB focuses on when setting interest rates, remained stable at 2.7%, with a slight decline in the cost of services offset by a rise in goods inflation.
Price growth in services, the largest component of the consumer price basket, has hovered around 4% over the past year and eased to 3.9% this month from 4.0% previously.
Services prices tend to be higher than the overall average, but policymakers argue that a figure closer to 3% is reasonable as the negative impact from energy and imported goods is expected to diminish over time.
While Friday’s reading did little to change the overall picture that inflation is slowly moving towards the ECB’s target more sustainably next year, a further cut in the 3.25% deposit rate is still seen as necessary.
The question now is whether the 25 basis point move on December 12 was enough or if the bank should opt for a larger cut of 50 basis points.
Although this debate is unlikely to be settled until policymakers receive the ECB’s new economic projections on the eve of the December 12 meeting.
Markets are fully expecting a small cut but see only a less than 10% chance of a larger move of 50 basis points at this time. However, expectations have fluctuated, and this percentage was close to 50% last week after a very weak business survey.
