German, Spanish Inflation No Smoking Gun to 50bp ECB Rate Cut in December

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The European Central Bank (ECB) might have to settle on a traditionally-sized 25 basis point rate cut next month following data showing inflation remains stubborn.

German CPI inflation rate rose from 2.0% to 2.2% year-on-year after a rise in energy inflation from -5.5% to -3.7% helped push the annual rate higher.

Germany's core inflation rate accelerated to 3.0% as services inflation remained unchanged at 4.0%.

Members of the ECB who think a gradual approach to cutting rates remains appropriate will point to the elevated levels of core and services inflation to oppose any attempt to cut interest rates by a forceful 50 basis points.

"The ECB, which worries about second-round effects from wage growth on inflation, watches services prices especially closely because labour costs make up a larger than average share of costs in the services sector," says Salomon Fiedler, an economist at Berenberg Bank.

The Euro has struggled over recent weeks as traders increasingly see the ECB cutting rates further and faster than its peers in the U.S. and UK.

However, these inflation data will caution against these expectations. They offer a timely reminder that the ECB doesn't have the all-clear to hasten the pace, as this could threaten to stoke inflation further.

"After today’s inflation data, we see little reason to change our calls for monetary policy rates in the Eurozone. We continue to expect 25bp rate cuts by the European Central Bank (ECB) at each of its next three meetings, bringing the deposit rate to 2.5%, before holding steady," says Fiedler.

Spanish headline HICP inflation rose from 1.8% to 2.4% in November, but core CPI measures edged down from 2.5% to 2.4%.

Spanish inflation is another closely-watched release as it can set the tone for the broader Eurozone as the pass-through rate of inflation is said to be faster in Spain.

These data come ahead of the all-Eurozone release due on Friday, where the expectation is for core inflation to have risen to 2.8% from 2.7% and headline HICP to have risen from 2.0% to 2.3%.

This would keep the ECB restrained to a 25bp cut in December.

Nevertheless, the slowdown in the economy and threats to growth will see some members of the ECB arguing for a more forceful 50bp move.

"We think there is a strong case for the ECB to step up the pace of interest rate cuts in December to 50bp rather than 25bp, given the dwindling risks of inflation flaring up again and the growing risks of prolonged stagnation," says Andrew Kenningham, Chief Europe Economist at Capital Economics.