The European Central Bank (ECB) is expected to keep interest rates at 2 per cent this week, as the weak dollar and trade diversion from China continue to dampen inflation risks.
After eight rate cuts, the bank appears to be in a holding pattern.
Despite the still uncertain fallout from US tariffs, a kind of equilibrium has settled on the euro zone economy with inflation and interest rates both steady at 2 per cent.
Markets are no longer pricing in another rate cut and some analysts believe the next move might be up.
London-based lender HSBC said it expects euro zone inflation to slip below the ECB’s 2 per cent target for most of next year as the pass-through from a stronger euro and US tariffs adds to disinflationary pressures.
However, it also warns that rising wage costs, fuelled by still-strong (if cooling) labour markets, the prospect that tariffs may reconfigure supply chains, and looser fiscal policy on the part of governments may result in a build-up of inflationary pressures in the medium term.
Hence, it sees interest rates rising again, but not until 2027.
HSBC noted that the ECB had managed to bring down inflation from a peak of 10.6 per cent “with a minimum amount of economic pain”.
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Of course, the cooling of headline inflation is only a partial victory for households with grocery price inflation still elevated, running at 5 per cent, according to the Central Statistics Office (CSO), and at 6.5 per cent according to supermarket analysts Worldpanel by Numerator.
ECB chief Christine Lagarde said officials must ensure food inflation eases.
Speaking in Florence, where the ECB holds its policy meeting this month, Lagarde said food inflation was “still up and it’s more up than” headline inflation.
Central Bank of Ireland governor Gabriel Makhlouf also said this month that food was an area that policymakers needed to pay particular attention to. The latest figures for Irish consumer prices will be published by the CSO on Thursday morning and should be some indication as to the direction of travel on grocery prices.
