Research Briefing | Oct 25, 2023

Eurozone inflation undershoot to spark ECB rate-cutting in 2024

We expect eurozone inflation will fall below the European Central Bank’s target in H2 2024. This is one of our key out-of-consensus views that puts us below the ECB’s forecast. Our call relies primarily on more pronounced disinflation from consumer energy and food prices than the ECB assumes. We anticipate a stronger slowdown in core inflation, given our weaker growth outlook.

What you will learn:

  • In our baseline, inflation falls below 2% by mid-2024, which will trigger rate cuts by the ECB. The council may be reluctant initially, but if inflation is as low as we think in 2024-2025, a sustained cutting cycle will be needed to prevent a sharp rise in real interest rates. We expect rate cuts to commence in April 2024 and amount to 150bps by year-end compared to the market’s 70bps.
  • Despite the recent sharp rise in oil and gas prices, as well as refinery margins leading to an upgrade of our 2024 inflation forecast, we think the delayed passthrough of lower wholesale gas and electricity prices to consumers will partially offset that in late-2024 and 2025. Similarly, we expect food prices to rise only modestly next year as falls in food commodity prices, energy costs, and other non-commodity costs have materially eased pipeline cost pressures.
  • We expect core inflation to slow but remain above 2% in 2024 as catch-up wage gains sustain high services inflation. This will partially offset an expected sharp drop in core goods inflation as pipeline pressures and supply bottlenecks ease and profit margins narrow amid weak demand.
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