Blow to hopes of large rate cut as eurozone inflation rises to 2%

Inflation rose to 2 per cent in the eurozone with higher economic growth and record low unemployment reducing the chances of an outsized cut in interest rates before the end of the year.
Average consumer prices in the 20-country eurozone rose from 1.7 per cent in September to 2 per cent in October, higher than the 1.9 per cent forecast by economists.
Third quarter economic growth figures also rose more than forecast in the bloc, with gross domestic product expanding by 0.4 per cent, compared with projections of 0.2 per cent. In further signs of an improving economy, the unemployment rate dipped from 6.4 per cent to 6.3 per cent, the lowest since the start of the single currency in 2000.
The data could deter policymakers at the European Central Bank from cutting interest rates by a bumper half a percentage point in December.
Isabel Schnabel, executive board member of the ECB, said this week that policymakers should take a “gradual approach” to monetary easing because “the fight against inflation is not yet won”.
Inflation was pushed up in October by a smaller decline in energy price inflation and rising food and tobacco prices. Key measures of core inflation, which strip out food and energy, were stable at 2.7 per cent a year and inflation in the services sector was unchanged at 3.9 per cent.
Headline consumer prices rose by 2.4 per cent in Germany, 1.5 per cent in France and 1 per cent in Italy. The lowest inflation rate was recorded at 0 per cent in Slovenia and at 0.1 per cent in Ireland and Lithuania. Claus Vistesen, chief eurozone economist at Pantheon, a consultancy, said: “Today’s data and the downward revision to headline unemployment to a new record low will force markets to lower the probability of a 50 basis point rate cut in December. We think such expectations will drift further into the realms of unlikeliness with the November inflation numbers.”
The ECB became one of the first major central banks to cut interest rates in June in the face of disinflation and slowing economic growth. The European economy has been hit hardest by the global energy crisis caused by Russia’s invasion of Ukraine and consumers have turned to saving rather than spending, due to rising inflation and borrowing costs.
Borrowing costs currently stand at 3.5 per cent in the eurozone, lower than the 5 per cent in the US and UK. Both the Federal Reserve and Bank of England are expected to loosen policy by 25 basis points next week.
Quarterly growth between July and September was also boosted by France hosting the summer Olympics and Germany avoiding two consecutive quarters of contracting growth. Analysts at Citi, a US bank, upgraded their growth forecasts for the eurozone by 0.1 percentage points this year to 0.8 per cent and 1.1 per cent in 2025.
Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB could still choose to cut rates by 50 basis points before the end of the year. “While it is far from a done deal, we still think that by December the governing council is likely to conclude that policy needn’t be restrictive for much longer and that a 50 basis point [cut] would be appropriate,” he said.