The Euro-zone witnessed a decline in core inflation, marking a one-year low. This development supports predictions that the European Central Bank (ECB) will maintain interest rates at their current levels to assess the outcomes of its extensive series of rate hikes. The core inflation, excluding energy and food prices, stood at 4.5% in September, a reduction from the 5.3% recorded in August and notably lower than the median estimate of 4.8% in a Bloomberg economist survey. Headline inflation also showed a decrease from 5.2% to 4.3%, reaching a nearly two-year low, driven by declining energy costs and a significant slowdown in services.
Following this release, German bonds experienced an upswing, with the 10-year yield dropping by 8 basis points in a single day, indicating the most substantial decline since August. This rally followed concerns that the ECB might need to prolong its policy of restriction to tackle inflation, prompting the yield to almost reach 3% on the previous day, a level last observed in 2011.
The latest data provides a definitive indication that core price growth, a vital metric during monetary policy tightening, is on a clear downward trajectory. However, both measures, though on the decline, remain significantly higher than the ECB's 2% goal. Market participants are preparing for an extended period of elevated borrowing costs. This news highlights the varying trends within the 20-member Euro zone, where German inflation hit a two-year low this month, while Spain's reading surged back above 3%.
According to Bloomberg Economics, the unexpected drop in September's inflation gives the ECB's Governing Council more confidence that further tightening may not be necessary. Despite this, the expectation is that the ECB will not proceed with additional rate hikes after the 10 consecutive increases since July 2022, which have elevated the deposit rate to 4%. There's a general consensus among policymakers that further tightening is unnecessary, although some caution that unexpected shocks, such as oil prices reaching $100 a barrel, might warrant additional action.
A similar stance is observed in the US, where the Federal Reserve's preferred inflation measure is projected to have slowed below 4% in August. Fed officials have indicated that they are at least close to the peak in rates. France's central bank governor, Francois Villeroy de Galhau, mentioned that the current borrowing costs are "appropriate," echoing the sentiment that the ECB can successfully steer inflation back to the target.
Evidence is mounting that the ECB's measures are impacting the already struggling economy, adding weight to the argument for a pause. Recent data shows that borrowing by companies grew at the slowest pace in nearly eight years in August, and consumer confidence cooled for the fifth consecutive month due to consumer pessimism. Germany, the largest economy in the Eurozone, is facing significant challenges and is likely to witness a contraction in output this quarter. However, rising wages may stimulate a spending rebound, potentially revitalizing growth towards the year-end.
Despite these possibilities, salary pressures could complicate the path to disinflation. Full clarity on the pace at which price gains might recede may not be achieved until well into 2024, as noted by ECB Chief Economist Philip Lane. While future rate hikes are not completely ruled out, interest rates are expected to remain stable for the foreseeable future, as stated by Latvian central bank chief Martins Kazaks. Bloomberg Economics' nowcast model, which accurately predicted September's inflation figure, indicates an October reading of 3.1%.
Inspirer: By Alexander Weber at Bloomberg