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Eurozone inflation down more than expected but further interest rate rises ahead

Euro coins (PA Archive)
Euro coins (PA Archive)

Eurozone inflation fell more than expected, figures released today show, as energy prices came off their mid-2022 peaks.

Consumer price growth slowed from 10.1% in November to 9.2% in December, significantly lower than market expectations of 9.7%, according to a poll by news agency Reuters.

However, core inflation, a measure which excludes a number of more volatile prices such as energy, rose from 6.6% to 6.9%, intensifying the challenge facing the European Central Bank in bringing inflation down to its target of 2% and raising the prospects of further interest rate rises in the months ahead.

Over 70% of analysts now expect the ECB to raise interest rates by a further 0.5% when it meets in February, according to Refinitiv data, while as many as 28% anticipate a 0.75% rise. Almost one in four analysts expect Eurozone interest rates to reach 3.75% by the middle of 2023.

Bert Colijn, senior economist at ING, said: “While supply-side shocks are fading – not just energy, but also think of container prices and various production inputs – core inflation is still adjusting with a lag.

“The ECB has taken a very hawkish stance towards this development and has indicated that it will hike through a mild recession to bring inflation structurally down to 2%.

“With energy inflation dropping quickly and energy supply forecasts improving, 2% could be reached much sooner than expected. Still, rising core inflation will be enough for the ECB to continue to hike by 50bp in February and March.”

City analysts expect interest rates set by the Bank of England to rise further than the Eurozone over the coming months, with 56% forecasting a rise to 4.75% in the middle of June, according to Refinitiv.