Euro Zone Inflation Ticks Up, Pointing To Steady ECB Rates

Euro zone inflation unexpectedly ticked up last month, likely solidifying bets that no further European Central Bank rate cuts are coming anytime soon, data from Eurostat showed on Tuesday.

Inflation in the 20 nations sharing the euro accelerated to 2.2% from 2.1% a month earlier, hovering near the ECB's 2% goal for most of this year, as falling energy prices offset still robust domestic price pressures, particularly in services.

Underlying figures, which exclude volatile food and fuel prices held steady at 2.4% on continued quick price growth in services but muted figures for durable goods.

The figures confirm the ECB's own view that inflation is largely defeated and policymakers now have ample time to watch price developments unfold before contemplating any further action.

This is why markets see almost no chance of a cut in the ECB's 2% deposit rate at the bank's last meeting for the year on December 18 and see only a one-in-four chance of any easing next year.

The ECB has cut rates by a combined 2 percentage points in the year to June but has been on the sidelines ever since.

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Rate cut talk may get a new lease on life early next year, however, when inflation is set to dip below target on the continued fall in energy costs.

This is seen as a temporary undershooting and the bank tends to look past energy-induced price volatility. But some worry that excessively low figures could weigh on expectations, making low inflation self-perpetuating.

Natural gas prices are now more than 40% lower than a year ago and crude oil (LCOCc1) is down by over 10%, suggesting that plenty of energy deflation is yet to come.

Energy prices were down by 0.5% in November from a year earlier, while services inflation was 3.5% and unprocessed food prices were up 3.3%.

Inflation in non-energy industrial goods, watched to see the impact of Chinese dumping, was 0.6%.

A long list of policymakers have said that the ECB can live with small deviations as long as underlying trends point to a return to target.

Policymaker confidence is held up by relatively upbeat economic data, which suggest that the bloc is weathering exceptionally high uncertainty quite well.

While the economy is not booming, surveys and hard data continue to point to decent expansion near the bloc's potential, which is somewhere in the 1% to 1.5% range.

Growth is also supported by a relatively tight labour market and separate data from Eurostat showed that the jobless rate inched up to 6.4% in October.

Source: Reuters