Eurozone inflation peaks in three years

Inflation in the Eurozone accelerated in October, reaching twice the target of the European Central Bank (ECB). The continuation of price pressures supported expectations that the bank would need to tighten monetary policy further.

Consumer prices rose 4 percent on an annual basis in October, according to data released by Eurostat on Wednesday. Annual inflation, which was 3.8 percent in September, thus reached its highest level since September 2023. The data was in line with the median forecast of economists participating in the Bloomberg survey.

While core inflation, excluding the effects of volatile items such as energy, remained stable at 2.5 percent, in line with expectations, services inflation increased to 3.3 percent.

Interest rate increase expectation in December

While the European Central Bank kept interest rates constant last month, officials signaled that if the inflation outlook does not improve, it may raise interest rates for the third time since the start of the Iran war.

While ECB President Christine Lagarde stated that the direction of monetary policy is clear, some members of the Governing Council emphasized in their statements this week that the interest rate decision in October does not mean that the tightening cycle is over.

Bundesbank President Joachim Nagel stated that if the inflation outlook does not improve, a new interest rate increase may be needed in December.

Investors and analysts predict that the new three-month economic forecasts to be published in December will provide a more comprehensive assessment of the outlook for the 21-member Eurozone economy and may pave the way for an interest rate increase.

In the markets, the ECB deposit rate, currently at 2.5 percent, is expected to reach 3 percent or higher next year.

Energy-related price pressures are being monitored

While the recent rise in inflation is largely limited to energy prices, the ECB continues its cautious approach against the risk of price increases spreading to other areas of the economy.

The bank aims to prevent the energy-related shock from creating more permanent inflationary pressures by causing sharp increases in wages and companies' sales prices. However, the ECB's internal indicators monitoring wage developments point to a significant slowdown in wage increases in 2027.

The economy's resilience to tightening will be tested

The main question regarding monetary policy stands out as to what extent the 21-member Eurozone economy can withstand additional interest rate increases.

While the Eurozone economy has so far resisted the effects of the conflict in the Middle East, it has also managed to overcome the pressures created by the tariffs imposed by US President Donald Trump. Despite the financial and political problems in France, economic growth in the third quarter was above expectations.

However, if the ECB raises interest rates once again, it will push borrowing costs to the upper end of the range where their impact on the economy is considered neutral.

The rise in global bond yields and the decrease in natural gas storage levels with the start of the winter months are among the other risks facing the Eurozone economy.