(Bloomberg) -- German inflation quickened more sharply than expected and exceeded the European Central Bank’s 2% target – underpinning the challenges for policymakers in deciding on the pace and extent of further monetary-policy easing.
Consumer-price growth in Europe’s largest economy picked up to 2.4% in October from 1.8% the previous month – well above the 2.1% median estimate in a Bloomberg survey. Base effects linked to energy helped drive the uptick, with services, goods and food also contributing, according to statistics agency Destatis.
Inflation in Germany and the euro area slowed more than expected in recent months, which, together with weaker economic data, has led the ECB to accelerate the pace its interest rate cuts. It lowered its key deposit rate in mid-October for a third time this year to 3.25%, after a similar move only five weeks earlier.
Policymakers expect further reductions, but have increasingly divergent views on the timing and overall amount.
While more dovish officials worry about a prolonged undershooting of the 2% target and a return to the low-inflation, low-growth environment that preceded the pandemic, their hawkish colleagues focus more on still-elevated domestic price pressures and lingering risks.
Surprisingly strong growth numbers across the region earlier on Wednesday might support arguments to maintain more gradual easing. The 20-nation bloc’s economy expanded 0.4% in the third quarter — with even Germany avoiding the recession it was widely tipped to endure.
The data prompted investors to pare bets on ECB rate cuts, pricing around a 25% chance of a half-point move in December. Earlier this month, the implied probability was 50%, according to swap pricing.
What Bloomberg Economics Says...
“Together with stronger-than-expected GDP growth in the euro area, this may lower the likelihood of a 50-basis-point interest rate cut in December but shouldn’t cause too much of a headache for the ECB. The disinflation process will likely resume at the beginning of next year and we expect the headline reading to average below the 2% mark in 2025.”
—Martin Ademmer, economist. For full react, click here
The ECB expects consumer-price growth to rise again toward the end of the year due to base effects, before falling again in 2025, but eagerly await new staff projections on growth and inflation at the December meeting to confirm that.
Analysts surveyed by Bloomberg forecast euro-area inflation to increase to 1.9% in October from 1.7%, with Eurostat publishing a first estimate on Thursday, but economists said on Wednesday that there’s an upside risk to that. The Bloomberg Economics Nowcast sees a reading of 2.1% for the region.
--With assistance from Kristian Siedenburg, Joel Rinneby and Andrej Sokol (Economist).
(Updates with BE after seventh paragraph, Nowcast in final)
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