In recent economic developments, Eurozone consumer prices have exhibited a notable slowdown, raising the possibility that the European Central Bank (ECB) might reconsider its interest rate hiking strategy. Eurozone’s September Consumer Price Index (CPI) eased to a +4.3% year-on-year rate from August’s +5.2%, surpassing expectations of +4.5% and marking the slowest rate of increase in nearly two years. Additionally, September’s Core CPI showed a decline to +4.5% year-on-year from +5.2% in August, beating expectations of +4.8%, and registering its slowest pace of increase in 13 months.
After implementing interest rate hikes for ten consecutive meetings since July 2022, which elevated the deposit rate to 4.0%, the recent positive inflation news may prompt the ECB to consider a pause in its rate hikes. Commerzbank AG expressed its view, stating, “The ECB is unlikely to raise rates any further.” Furthermore, ECB Governing Council member Kazaks mentioned, “Interest rates will probably remain steady for an extended period. However, if inflation doesn’t go down, then there could be a small increase.”
The dovish Eurozone inflation figures from today have contributed to a decline in European government bond yields, reversing the trend seen recently, when the 10-year German bund yield reached a 12-year high of 2.983% on Thursday. This shift in global bond markets reflects a reassessment of the outlook for central banks around the world to maintain higher interest rates for a more extended period. Amundi SA noted, “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 Eurozone’s weak economic landscape is adding to the pressure on ECB policymakers to reconsider their rate hike plans. Recent revisions have lowered Eurozone Q2 GDP figures, and Germany’s economic institutes have downgraded their expectations for German economic growth this year, shifting from a slight expansion to a contraction. More ECB policymakers are leaning towards a pause, with Governing Council member Villeroy de Galhau emphasizing that the ECB should avoid pushing the economy to its limits and should instead focus on maintaining high-interest rates.
Even if the ECB decides to pause on interest rate increases, it may not lead to a significant drop in bond yields. ECB President Lagarde recently stated, “Our future decisions will ensure that the key ECB interest rate will be set at sufficiently restrictive levels for as long as necessary,” underscoring the ECB’s commitment to a cautious approach even amid economic challenges. Barclays also noted, “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.”
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