The Strategist

ECB's fight against inflation cuts euro zone economy

11/06/2023 - 03:16

According to Eurostat figures, annual inflation in the eurozone fell to 2.9 percent in October from 4.3 percent in September. This is the lowest level since July 2021, and it helps to explain the European Central Bank's (ECB) recent decision to maintain key interest rates unchanged at September levels.
Eurostat reports that eurozone inflation fell to 2.9 percent in October, its lowest level since July 2021. Inflation has slowed as a result of the ECB's tight monetary policy. It was also the reason for the regulator's recent rejection to boost rates. At that, the high base effect does not explain the October drop in prices; inflation stayed steady at 9-10% from August to December 2022.

Eurostat data shows that the most significant contribution to the October slowdown in inflation was achieved by a drop in energy prices, which decreased 11.1% year on year (4.6% a month earlier). Excluding food and energy, price growth fell to 4.2% in October (the slowest since July 2022), down from 4.5% in September.

The ECB does not expect inflation to recover to the 2% objective in the next two years: the regulator predicts 5.6% in 2023 and 3.2% in 2024.

The ECB is concerned about the progression of the violence in the Middle East. According to World Bank forecasts, if supplies from the region are severely disrupted, oil prices may jump to $150 per barrel. At that, the conflict between Hamas and Israel has had little effect on oil flows thus far, and a big increase in energy costs is only envisaged if Iran is brought into the conflict.