Eurozone Inflation Preview: With Oil Down 30% And Inflation Decelerating, ECB Rate Hike Chances Fall

• The headline inflation in the Eurozone is expected to decelerate to 2.0 percent y/y in November while core inflation is seen unchanged at 1.1 percent y/y.
• The ECB monetary policy is expected to remain intact on inflation data as the ECB is preset to end the asset purchasing program in December and chances of delivering a rate hike pricing out due to the economic slowdown. 
• The ECB Governing Council member Patrick Lane downplayed the slowdown saying: “Important is not to be overly dramatic about the slowdown.”
• Money market futures indicate a 70 percent chance of ECB rate hike next year and keep falling lower.

The preliminary reading of the Eurozone inflation is expected to see the headline Consumer Price Index (CPI) decelerate to 2.0 percent over the year in November while core inflation stripping the consumer basket off food and energy prices is expected to remain unchanged at 1.1 percent over the year, the Eurostat is scheduled to report on November 30 at 10:00 GMT.

The headline inflation decelerating in November largely reflects the oil price development. The oil prices fell from the opening level of $73.48 at the beginning of October to about $50 level at the end of November indicating that this 32 percent fall should be transformed in the headline inflation development as well.

As the Eurozone inflation is the average of all national averages and it tends to be very predictable, rarely deviating from the market expectations, not much of a surprise factor is stemming from this report. This is also underlined by the fact that the top ECB officials are constantly using very conservative outlook while talking about inflation, as the primary target of ECB’s monetary policy.

This was underlined by the Irish ECB Governing Council member Patrick Lane who interpreted recent sharp deterioration in the Eurozone economic activity in the context of last year’s rise above expectations. According to Lane, the Eurozone growth in 2017 was surprisingly strong and 2018 slowdown is partly a reversal. “Important is not to be overly dramatic about the slowdown,” Lane said. 

This confirms the market expectations of the ECB being firmly anchored to end the asset purchasing program in line with its plan in December before moving to the topic of interest rates. Given the recent sharp deceleration in the economic activity including forward-looking PMIs, the market was re-pricing the probability of the ECB hiking rates next year lower.

The Eurozone money markets futures are now pricing in roughly 70 percent chance of the ECB rate hike next year and are further scaling back the rate hike bets.

Decomposition of the Eurozone inflation in October 2018