ECB grappling with sticky services and core inflation
Headline inflation in the euro area may have cooled near to the European Central Bank’s 2% target in recent months, but core inflation — excluding the effects of energy, food, alcohol and tobacco — has held at 2.7% for three straight months.
Services inflation has meanwhile held stubbornly near 4% through the latter half of this year, as negotiated wage growth — another concern for the inflationary outlook — rose to 5.42% in the third quarter from 3.54% in the prior period.
In its most recent forecast in September, ECB staff macroeconomic projections put average euro area inflation at 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. Those forecasts were unchanged from June.
— Jenni Reid
Economists expect ‘lively debate’ resulting in a 25-basis-point cut
The European Central Bank will debate whether to cut by 25 or 50 basis points on Thursday, but will ultimately settle on the smaller move, several economists told CNBC.
A key point of discussion is likely to relate to how low interest rates need to go to become “neutral” — the point at which monetary policy is neither stimulating nor restricting economic growth.
Last month, influential policymaker Isabel Schnabel told Bloomberg that rates were getting “closer to neutral territory,” which she estimated at 2% to 3%, and cautioned against going too far below that.
However, more dovish members such as French central bank Governor Francois Villeroy de Galhau have continued to say that any size of a cut should be an option in December, and that moving rates below neutral — into accommodative territory — could be needed if growth remains subdued and inflation falls below target.
“This is the ECB, so they always move very slowly… part of the problem is the ECB council is very divided,” Fabio Balboni, senior European economist at HSBC, previously told CNBC’s “Squawk Box Europe,” forecasting “very lively debate” at the December meeting and a 25-basis-point decision.
Weak economic data points including German retail sales will all be under consideration, along with disagreement over whether the fight against inflation is “not quite done,” Balboni said.
Bank of America Global Research strategists said in a note on Tuesday that the ECB was likely to cut by 25 basis points at every meeting, including in December, until September 2025.
“With an economy that will be growing at or below trend for most of 2025, we think it will be hard for the ECB to skip a meeting until the [deposit facility] falls slightly below where it sees the neutral rate (2%), to where we see it (1.5%),” they said.
— Jenni Reid
