Inflation fell faster than expected in the EU with economists suggesting that the European Central Bank (ECB) would soon turn its attention to rate cuts.
A flash estimate from Eurostat showed that annual inflation fell to 2.4 per cent in November, down from 2.9 per cent the month before. Traders had expected inflation to fall to 2.7 per cent.
Food inflation for the month came in at 6.9 per cent, down from 7.4 per cent the month before. Energy prices meanwhile fell 11.5 per cent in the year.
Core inflation – which strips out volatile components like food and energy – dropped from 4.2 per cent to 3.6 per cent.
“The November inflation flash prints confirmed price pressures are coming down quickly across all components of the inflation basket,” Marc de Muizon, senior economist at Deutsche Bank Research said.
The figures will call into question the ECB’s determination to keep rates at their current level for an extended period of time.
Over recent weeks policymakers have pushed back against market expectations that rate cuts will start in the first half of next year.
Last week, Francois Villeroy de Galhau, an ECB rate-setter, said rates would be left on hold for the “next few quarters” while Christine Lagarde has argued loosening would not start for at least half a year.
But markets are growing increasingly dubious. “The larger-than-expected fall in inflation in November means it is becoming increasingly untenable for policymakers to claim that they are not even thinking about rate cuts,” Andrew Kenningham, chief Europe economist at Capital Economics said.
The inflation data also adds to a growing picture that the ECB’s rate hikes have helped cool the economy.
Although it left rates on hold in its latest meeting, interest rates across the eurozone stand at their highest level since the financial crisis.
As a result, economic activity has slowed. Figures out this month confirmed that GDP in the eurozone slipped into contraction in the third quarter of this year, meaning it stands on the cusp of a recession.
Looking into next year, the European Commission forecasts the eurozone to grow 1.3 per cent, a downward revision of 0.1 per cent on its summer forecast.
“There is still a lot more of the impact of tightening to come as interest payments are still increasing,” Bert Colijn, senior economist at ING said. “The market is therefore right to start looking at rate cuts for 2024.”