Eurozone Inflation Rises : Will The ECB Hold Off On Rate Cuts ?

The inflation in the euro area continues to attract particular attention as markets await the publication of December’s figures. According to FactSet estimates, the increase in consumer prices is expected to reach 2.4 % year-on-year, compared to 2.2 % in November. This progression, although moderate, raises questions about the trajectory that the European Central Bank (ECB) is about to take. On one hand, some investors are betting on a quick monetary easing, convinced that inflation will gradually return to the 2 % target set by the ECB. On the other hand, the sustainability of underlying inflation at 2.7 %, driven by rising prices of services and food products, prompts the central bank to be cautious. As the ECB is set to hold its first meeting of the year on January 30, balancing support for the economy and controlling prices appears to be particularly delicate.

Rising Inflation : An Ambiguous Signal for the ECB

The latest inflation figures for the euro area confirm a rise of 2.4 % year-on-year in December, compared to 2.2 % in November, according to FactSet estimates. Despite this moderate progression, underlying inflation, which excludes volatile energy and food prices, remains at 2.7 %, a level significantly above the 2 % target set by the European Central Bank (ECB). This stability in core prices, combined with a slight acceleration in overall inflation, fuels speculation about the monetary policy that the institution will adopt during its first meeting of the year, scheduled for January 30.

Investors and economists remain divided on the implications of these figures. Michael Field, market strategist at Morningstar, believes that these results could upset the optimistic forecasts for a rapid monetary easing. “For the more cautious, this could cause concerns, while some observers wondered a few months ago whether the ECB had delayed in adjusting its rates, and worse, whether we were not entering a deflationary phase,” he emphasizes. He insists that as long as underlying inflation remains at 2.7 %, the ECB may hesitate to aggressively cut rates.

The analysis of various inflation components sheds light on the main drivers of this increase. In November 2024, services made the largest contribution to inflation, with an increase of +3.9 percentage points. Food products, alcohol, and tobacco followed, with an increase of +2.8 points, while industrial goods excluding energy showed a more moderate rise of +0.7 points. In contrast, the energy sector had a deflationary effect (-1.9 points), partially offsetting the acceleration in other categories.

These trends show that inflation remains primarily driven by rising prices for services and food, two components that are often rigid and less sensitive to short-term monetary adjustments. If this dynamic continues, the expected disinflation in 2025 could prove slower than anticipated, thereby complicating the ECB’s maneuvering room.

Towards Monetary Easing in 2025 ?

Although inflation remains above the 2 % target, the ECB is maintaining the course for a gradual easing of its monetary policy. During its December meeting, it revised down its inflation forecasts for 2025 to 2.1 %, compared to 2.3 % in its previous estimates. This correction confirms its medium-term price stability objective and reinforces the hypothesis of a continued reduction in rates in the coming months.

For Mark Wall, chief economist at Deutsche Bank Research, inflation may have peaked at 2.4 % in December before beginning a gradual decline below the 2 % threshold in the first few months of 2025. He believes that the risk of inflation being too low is currently more likely than an upward surge. “In reality, the risks for next year are more oriented towards inflation below 2 % rather than above,” he analyzes. This perspective reassures investors that the ECB may speed up its rate cuts to accompany this dynamic.

The anticipation of a new reduction in interest rates as early as January is gaining momentum, especially since the ECB already implemented a 0.25 % cut in December, bringing its deposit rate to 3 %. However, observers are divided on the extent of the expected movement this year. Some predict a gradual descent towards 1.50 % by the end of 2025, while others estimate that the ECB may stop around 2 % to avoid a premature inflation rebound.

The impact of this monetary policy on financial markets remains a major issue. A more flexible approach by the ECB could stimulate European stocks, which currently show a significant discount compared to American markets. According to Goldman Sachs, inflation should converge towards the 2 % target by the end of the year, but price adjustments at the beginning of the year are a key variable to watch. Moreover, if inflation slows as expected, the ECB may have sufficient room to accelerate rate cuts, thereby enhancing the competitiveness of European assets compared to their global counterparts. Conversely, any sustainability of inflationary pressures could force the institution to hesitate in its decisions, with direct consequences for corporate financing and market dynamics.

The coming months will be decisive for the orientation of monetary policy in the euro area. If inflation follows the anticipated trajectory and approaches the 2 % target, the ECB could accelerate its rate cuts, thereby facilitating access to credit and stimulating investment. Conversely, an unexpected rise in prices, driven by higher energy costs or tensions in supply chains, would complicate this strategy and force the institution to hesitate. This dilemma will be closely monitored by the markets as the euro area seeks to reconcile economic growth and price stability in an uncertain context.