FRANKFURT, Germany – In November, inflation in the 20 euro-using nations increased, a development that may not deter the European Central Bank (ECB) from considering interest rate reductions. Concerns about sluggish growth, particularly in light of potential new U.S. tariffs anticipated under the incoming Trump administration, are casting a shadow over economic forecasts.
The European Union’s harmonized index of consumer prices indicated a rise of 2.3% year-on-year for November, up from 2.0% in October, as reported by Eurostat. Despite a 1.9% decrease in energy prices over the past year, this was counterbalanced by a notable 3.9% hike in the services sector, which encompasses a wide range of services including haircuts, medical care, accommodations, and recreational activities.
Inflation has significantly dropped from its peak of 10.6% in October 2022, following vigorous interest rate hikes by the ECB aimed at curbing soaring prices. However, the ECB began to lower rates again in June as concerns about economic growth became more pronounced.
Central banks use elevated benchmark rates as a tool to tackle inflation by impacting overall borrowing costs across the economy. Increasing rates result in higher expenses for purchasing on credit, whether for a vehicle, home, or business expansion. This, in turn, typically decreases consumer demand for such goods, alleviating pressure on prices. Nevertheless, elevated borrowing costs can also hinder economic growth.
Recent reports from S&P Global revealing a contraction in the eurozone’s economy for October have intensified worries regarding growth. Additionally, uncertainties surrounding the trade policies of the incoming U.S. administration, including potential new import tariffs, pose further risks to Europe’s export-reliant economy. Donald Trump is scheduled to assume office on January 20.
The European Commission’s latest predictions anticipate that the eurozone’s economic output will grow by 0.8% this year and by 1.3% in the following year. This scenario has led discussions heading into the ECB’s meeting on December 12 to center less on whether to lower rates and more on the extent of any potential cuts. Market speculation has even considered the possibility of a larger-than-usual half-point reduction from the current benchmark rate of 3.25%.
In Germany, the largest economy within the eurozone, inflation remained steady at 2.4%. This stability may bolster arguments against a 50 basis point reduction, according to Carsten Brzeski, who serves as the global chief of macro at ING bank. The ECB is responsible for determining interest rate policies for the European Union member nations that have adopted the euro.