Economic news today showed a slowdown in Eurozone consumer prices that may allow the European Central Bank (ECB) to pause its interest rate hiking campaign. Eurozone Sep CPI eased to +4.3% y/y from +5.2% y/y in Aug, better than expectations of +4.5% y/y and the slowest pace of increase in almost two years. Also, Sep core CPI eased to +4.5% y/y from +5.2% y/y in Aug, better than expectations of +4.8% y/y and the slowest pace of increase in 13 months.
After raising interest rates for ten consecutive meetings since July 2022 that pushed the deposit rate to 4.0%, today’s welcome inflation news could finally prompt the ECB to pause its rate hikes. Commerzbank AG said today that “The ECB is unlikely to raise rates any further.” Also, ECB Governing Council member Kazaks said, "Interest rates will probably remain steady for an extended period. However, if inflation doesn't go down, then there could be a small increase."
Today’s dovish Eurozone inflation news knocked European government bond yields lower today after the 10-year German bund yield climbed to a 12-year high of 2.983% on Thursday. Global bond markets are repricing on the outlook for the world’s central banks to keep interest rates higher for longer. Amundi SA said, “Inflation is still quite high, even if it’s decelerating. This deceleration is something that’s occurred already in the U.S., and in the meantime, rates have increased.”
The weak economic backdrop in the Eurozone is also pressuring ECB policymakers to pause their rate hike plans. Eurozone Q2 GDP was revised lower this week, and Germany’s economic institutes downgraded their views on German economic growth this year to a contraction from a previous projection for a slight expansion. More ECB policymakers are siding for a pause, with Governing Council member Villeroy de Galhau saying the ECB mustn’t take the approach of testing the economy to a breaking point and should instead focus on persisting with high-interest rates.
Even if the ECB does pause on raising interest rates, bond yields may not fall much. ECB President Lagarde recently said, “Our future decisions will ensure that the key ECB interest rate will be set at sufficiently restrictive levels for as long as necessary,” even as the economy struggles. Also, Barclays said, “Looking at how long-end bonds are trading globally, it’s increasingly evident that a more dramatic deterioration in macro data may be needed to generate a sustained turnaround in yields.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
