European Inflation at 3.8% Strengthens Bets on December Rate Hike

Key Facts

Markets are turning their attention to the European Central Bank’s December meeting after Reuters reported that three policymakers consider a rate increase to 2.75% on December 17 almost certain, unless energy prices suddenly collapse. This comes as euro area inflation reached 3.8%, exceeding the bank’s 2% target, according to the Associated Press. The bank left rates unchanged at its latest meeting, the agency reported. These figures put the price outlook at the center of the debate over the next decision. The officials’ comments do not represent an official Governing Council decision.

Reuters quoted three officials as saying the potential increase would be followed by a pause, signaling that the discussion is not about a continuous path of tightening. The agency linked the bank’s estimates to the impact of high bond yields on the economy in subsequent years. According to its estimates, elevated yields could reduce growth by a cumulative 100 basis points in 2027 and 2028 compared with September forecasts. They could reduce inflation by a cumulative 90 basis points over the same period and on the same comparative basis. This highlights how financing conditions can affect assessments of the need for further increases.

In the United States, an Associated Press survey found that most economists expected a quarter-point increase in the federal funds rate at the Federal Reserve’s December 8 and 9 meeting. The agency said investors at the time saw the odds of an increase approaching 85%. These estimates concern the December meeting as reported in the agency’s October story; they are not a signal of a decision made at the meeting. This shows that expectations of tighter policy were not limited to Europe at the time. The facts available here provide no evidence of similar signals from the Bank of Japan.

In Britain, the Bank of England had held its rate at 3.75% in September by a 6-to-3 vote. The three dissenting members voted for an increase of 0.25 percentage points to 4%, while the six others favored holding the rate. The bank said consumer price inflation rose to 3.1% in August and that inflation risks were tilted to the upside. Supporters of an increase argued that acting preemptively could help anchor inflation expectations, citing the energy shock, rising food prices and the possibility that these would feed through to wages and prices. The September minutes thus showed disagreement within the committee over when to respond to the risks.

The Bank of England minutes also showed that the short-term interest rate curve had risen, reaching about 4.9% by the end of 2027 based on market pricing cited in the minutes. From the period before the July report through September 14, the spot price of Brent crude rose 36%, while British wholesale gas prices increased 78%. The bank said global energy prices had become more volatile since the supply shock. These figures provide context for concerns that energy costs could feed into inflation, concerns cited by committee members who supported an increase. But they relate to the Bank of England’s September assessment and do not, on their own, establish the European Central Bank’s policy path.

For upcoming data, the European Central Bank’s calendar schedules the release of the seasonally adjusted preliminary estimate of euro area inflation in October for November 4 at 15:00. The calendar did not confirm a 4% forecast for the region; the preliminary reading of 4.0% year over year applies to Ireland alone, according to Ireland’s Central Statistics Office. The bank’s Governing Council will then hold its next monetary policy meeting on December 16 and 17 in Frankfurt. The bank is scheduled to hold a news conference on the second day. The upcoming inflation reading and the scheduled meeting remain the next milestones in tracking the path of prices and interest rates.

Joachim Nagel, president of Germany’s central bank, said in an interview published on October 16 that he did not rule out further steps if the situation remained as it was. In the interview, he stressed that the European Central Bank’s approach was data-dependent and involved making decisions meeting by meeting. His earlier comments provide context for his stance on possible action, but they do not settle the Council’s December decision. The euro area’s preliminary inflation data will be released on November 4, ahead of the monetary policy meeting scheduled for mid-December. The decision remains the responsibility of the bank’s Governing Council.