Inflation Hits 2% in Eurozone, Markets Brace for Impact: Will ECB Implement Jumbo Interest Rate Cut?

Amsterdam, Netherlands – Inflation in the 20-nation euro zone reached 2% in October, according to preliminary figures released by statistics agency Eurostat on Thursday. This exceeded economists’ expectations, who had forecasted a slightly lower figure of 1.9%. In September, the headline reading was revised down to 1.7% from 1.8%, falling below market expectations.

The rise in the headline rate was mainly attributed to increases in prices for food, alcohol, and tobacco, which accelerated to 2.9% from 2.4%. Core inflation, excluding volatile components and energy prices, remained unchanged at 2.7%, slightly higher than the expected 2.6%. Additionally, services inflation, a key indicator of domestic price pressures, held steady at 3.9%.

Following the release of the inflation data, the euro strengthened against the U.S. dollar, reaching a two-week high of $1.0873. This latest inflation print will play a crucial role in determining whether the European Central Bank will consider implementing a potential half-percentage-point cut in interest rates at its upcoming meeting in December.

Throughout the year, the central bank has already reduced rates three times, resulting in a cumulative cut from 4% to 3.25%. Markets are currently pricing in another 25-basis-point reduction for December. Traders are also reviewing the latest growth figures for the euro area, which showed a better-than-expected 0.4% expansion in the third quarter.

The ECB’s October meeting acknowledged the sluggishness in economic activity in the euro zone, expressing confidence that inflation will not dramatically spike. Analysts remain cautious about the future economic outlook, but recent growth and employment figures have somewhat eased concerns about potential labor market risks.

Experts suggest that consecutive 25-basis-point rate cuts are likely the best approach moving forward, as the urgent need for below-neutral rates to boost the contracting eurozone economy is diminishing. The ongoing struggle with services inflation further supports the idea that a gradual easing cycle may be more prudent than rushing through rate cuts.