ECB Rate-Cut Odds Tumble As EU Inflation Re-Accelerates In December

Eurozone inflation re-accelerated in December, breaking seven months of declines, leaving analysts questioning whether The ECB will be able to cut rates as aggressively as the market had thought.

Euro area headline HICP inflation rose 52bp in December to 2.92% YoY, in line with consensus expectations.

The breakdown by main expenditure categories showed services inflation remained unchanged at 4.0%YoY, and non-energy industrial goods inflation fell four-tenths of a percentage point to 2.5%YoY. Of the non-core components, energy inflation rose 4.8pp to -6.7%YoY, while food, alcohol and tobacco inflation fell eight-tenths of a percentage point to 6.1%YoY.

But, you should just ignore this:

"December's jump in headline inflation in the eurozone was widely anticipated and entirely due to a base-effects driven increase in energy inflation, so it won't alter ECB policymakers' views on the outlook for monetary policy," said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

Except the market is not, as it prompted the market to cut the odds of a March ECB rate-cut significantly...

Source: Bloomberg

"The increase (in inflation) serves as a reminder that interest rate cuts in the first quarter are unlikely but this shouldn't dispel expectations of cuts later in the year," said Bert Colijn, senior eurozone economist at ING.

And expectations for total 2024 cuts have fallen to 140bps (from 190bps last week)...

Source: Bloomberg

“150 basis points of cuts is still ambitious,” said Christoph Rieger, head of rates research at Commerzbank AG.

He expects the ECB will only deliver half of that, broadly matching the majority of economists surveyed by Bloomberg.

“The gap versus consensus forecasts will probably shrink from both sides.”

Will we see the EUR slide back at the rate-differential implies?

And send the dollar even higher?