Eurozone Inflation Soars to New Record and Economy Grows, But ECB Tipped to Slow Rate Hiking Cycle

Image © Adobe Stock

Eurozone inflation has hit a new record after Eurostat reported prices jumped by a record 10.7% in October and separate data showed the bloc's economy grew faster than expected in the third quarter.

The inflation reading exceeded the 10.3% expected by the market and puts further pressure on the European Central Bank (ECB) to hike interest rates, although some economists say the central bank will soon slow the pace it raises interest rates.

The thrust of inflationary pressures continues to come from rising fuel prices, with the energy component rising an eye-watering 41.9% year-on-year.

Food was the second largest contributor to rising inflation, growing an estimated 13.1% in the year to October.

But price increases were broad-based and signalled inflation would remain above the ECB's target of 2.0% for an extended period:

The ECB raised rates by 75 basis points last week and a further such move is likely in December after core inflation accelerated to 5%, a fresh record, but a 50bp hike would be favoured if incoming data is to signal the economy is suffering a material slowdown in the fourth quarter.

Bets for further rate hikes will be assured by news the Eurozone economy grew at a pace of 0.2% quarter-on-quarter in the third quarter, faster than 0.1% the market expected.

News of a stronger-than-expected expansion in economic activity is broadly supportive of the single currency, although price action on the final day of October sees the Euro lower against the Dollar with EUR/USD at 0.9936.

Against the Pound, the Euro was however stronger, with EUR/GBP at 0.8601.

For both pairs, much will depend this week on the actions of the Federal Reserve on Wednesday and the Bank of England on Thursday.

Looking ahead, economists warn the Eurozone won't be able to defy a slip into negative growth for much longer.

"The eurozone contraction hasn't started yet as GDP growth for the third quarter came in at 0.2%. Inflation continues to increase though, which sets the eurozone economy up for a tough winter as a recession is looming," says Bert Colijn, Senior Economist for the Eurozone at ING.

Although inflation has reached a new record, and the economy continues to grow, ING warns the ECB will slow the rate it hikes interest rates.

"With economic conditions weakening and a recession in the making for the winter, we think the ECB is going make its next hike somewhat smaller at 50 basis points. Given the historic total size of the hikes the ECB is delivering, that will have quite the slowing impact on the economy next year," says Colijn.

Colijn says the tone of the ECB's October policy update was less 'hawkish' than expected and indicates we shouldn't come to expect such extensive rate hikes, such as the 75bp rise they gave us last week.

"The picture remains bleak," says Colijn, "consumer confidence is near historical lows as real wage growth is at a multiple-decade low at the moment. This weighs substantially on the consumption outlook, as retail sales have already been trending down over recent quarters."