KUALA LUMPUR: Eurozone inflation surged to 4% in October, hitting its highest level in three years and ramping up pressure on the European Central Bank (ECB) to deliver another interest rate hike before year-end.
The flash estimate from Eurostat matched economists' forecasts and accelerated from 3.8% in September, marking the first time headline inflation has breached the 4% mark since September 2023.
Surging energy prices remained the primary driver, with energy inflation climbing to 20.8% from 18.9% a month earlier as the net-importing bloc grappled with supply shocks stemming from the Iran war.
Price pressures varied significantly across the currency union, ranging from Malta’s low of 2.3% to Lithuania’s high of 6.1%. Crucially, every member state remained above the ECB’s 2% target, even as policymakers noted that underlying wage growth and core metrics remained broadly stable.
The print solidifies expectations of policy tightening. Money markets are now pricing in a greater than 72% probability of a rate hike at the ECB's December meeting, up from its current key rate of 2.5%.
However, analysts caution that the ECB's path forward is complicated by domestic turbulence. Robert Mertens of Validus Risk Management noted that ongoing French political unrest and instability in its bond market constrain how aggressively the central bank can tighten.
Should French fiscal tensions ease, stronger ECB tightening relative to the US Federal Reserve could offer significant upside support for the euro, which traded up 0.6% against the dollar yesterday.