The latest inflation data released by Eurostat in Luxembourg on December 3 shows that driven by the rebound in energy prices and strong service sector demand, the preliminary year-on-year value of the harmonized consumer price index (CPI) in the Euro Zone in November rose to 2.2%, a slight increase from 2.1% in October and slightly higher than the European Central Bank’s (ECB) 2% inflation target. This marks the first time the indicator has returned to above the target level since June 2024. Breakdown data shows that the core CPI (excluding volatile factors such as energy and food) remained at a high level of 2.4%, among which service sector inflation rose by 3.5% year-on-year, hitting a 12-month high. Price increases in areas such as hotel accommodation and air travel were particularly significant, mainly boosted by the year-end holiday consumption peak. Energy prices fell by 1.2% year-on-year but rose by 2.3% month-on-month, with the increase in crude oil transportation costs caused by tensions in the Middle East being an important driver. Food price inflation fell from 4.1% in October to 3.8%, with the recovery of some agricultural product supply chains playing a mitigating role.

After the release of the inflation data, market expectations for the ECB’s monetary policy have undergone a significant shift. Previously, the market had predicted that the ECB might start cutting interest rates at its monetary policy meeting on December 18, but current interest rate futures data shows that the probability of a rate cut has dropped from 45% before the data release to less than 5%. Bundesbank President and ECB Governing Council member Joachim Nagel clearly stated in an interview with the media that the current interest rate level in the Euro Zone is at an “appropriate position to ensure price stability”, and monetary policy remains generally neutral. Interest rate policies will not be adjusted easily until there is a clear downward trend in core inflation. He also revealed that the ECB will release a new inflation outlook report in March next year, and will comprehensively judge the policy direction based on economic growth, employment data and other factors at that time. In terms of market reactions, the euro rose 0.3% against the U.S. dollar in the short term to 1.0920, the yield on Germany’s 10-year government bonds rose by 5 basis points to 2.31%, and the Euro Stoxx 50 Index fell slightly by 0.2%. However, the banking sector rose against the trend by 1.1%, as investors expect the high interest rate environment to continue to support banks’ net interest margins.