Inflation in the euro area has taken a significant dip, reaching its lowest level in over two years. Euronews Business breaks down the latest figures.

The latest data from Eurostat reveals that the inflation rate in the euro area, or eurozone, declined to 2.4% year-on-year (y/y) in November 2023, down from a 2.9% annual rate in October 2023.

This slowdown in inflation brings the European Central Bank (ECB)'s 2% inflation target back into clear focus for the first time since the summer of 2021, potentially signaling an imminent shift in monetary policy.

The drop in inflation was driven by various factors. Energy costs fell by 11.5%, a more significant decline compared to October's -11.2%. In addition, inflation rates eased for services (4.0% vs. 4.6%), food, alcohol, and tobacco (6.9% vs. 7.4%), as well as non-energy industrial goods (2.9% vs. 3.5%).

Even after excluding the volatile energy and food items from the inflation calculation, price pressures have fallen to 3.6%, the lowest level since April 2022, and below the earlier forecasts of 3.9%.

Markets now fully price in ECB rate cut in April 2024

The ongoing trend of disinflation in the eurozone has prompted market bets on interest rate cuts by the ECB in 2024, as borrowing cost are currently at historic highs.

Prior to the release of the inflation data, euro area's interest rate futures already incorporated expectations of over 110 basis points of rate cuts in 2024. This effectively implied the possibility of at least four rate cuts of 25 basis points each by December 2024.

While Bank of Greece Governor Yannis Stournaras recently expressed some skepticism about an April rate cut, the weaker-than-expected November inflation report has led traders to fully price in a rate cut for April 2024.

However, the November inflation report has further reinforced market expectations that the ECB will cut rates earlier next year, with traders now fully pricing in a cut in April.

“Risks for euro zone economy are tilted to the downside,” Bank of Italy Governor Fabio Panetta, known for his dovish stance within the ECB board, said after the release of the inflation report. - Euronews