After eurozone inflation increased slightly in December, raising speculation about when the European Central Bank (ECB) will cut interest rates, investment managers discuss the impact.

Eurozone inflation rose from 2.4 per cent in November to 2.9 per cent in December, driven by an increase in energy costs, according to flash estimates from the EU statistics agency Eurostat released on Friday.

This marks a reversal of six months of consecutive declines, but it is still broadly in line with market expectations, causing speculation that it might not result in a major shift in the timing of the ECB’s first rate cut in 2024.

Core inflation, which excludes volatile fuels and food prices, fell to 3.4 per cent from 3.6 per cent. The ECB has said that interest rates, which currently stand at a high of 4 per cent, would be set at sufficiently restrictive levels for as long as necessary for a timely return of inflation to its 2 per cent target.

Here are some reactions to the figures from investment managers.

Neil Birrell, chief investment officer, Premier Miton Investors 
“Headline eurozone inflation data for December came in much as expected. There was a short-term impact from a pick-up in energy prices, but that should fall away, and the ECB will be happy with the overall trend. While markets probably got a bit ahead of themselves in their expectations for rate cuts, the prospect of sizable cuts in 2024 remains in place in the face of a slowing economy.”

Michael Field, European market strategist, Morningstar
“Some investors will undoubtedly be concerned that this spike in inflation may put the ECB off cutting interest rates sooner rather than later. However, central bankers were always aware of the potential for this spike in inflation, thus it shouldn’t factor in on their decision-making. However, all eyes are on next month's inflation release, and whether we can get back to that all important downward trend.”

Charles Hepworth, investment director, GAM Investments 
“Both inflation readings are still some way off from the 2 per cent target and, with ECB policymakers signalling that inflation may go higher in the short term, this does complicate the timings that markets see for rate cuts from the ECB. A tempering of rate-cut expectation euphoria will inevitably translate into soggier market performance and that is what we are seeing so far this year.”

Daniele Antonucci, chief investment officer, Quintet Private Bank (parent of Brown Shipley)
“These figures are likely to challenge the market view that the European Central Bank is about to cut interest rates. But, while timing for the first rate cut expected by the market, possibly as soon as March, seems optimistic to us, the direction is one where the key policy rate should decline over time. The general trend this year should be one of a weakening global economy with slower growth and moderating inflation (but still above central bank targets). The US, eurozone and UK are all likely to decelerate further and we see a high probability of a shallow recession, though this seems more likely in the eurozone than in the US, with the UK in between.

“We think the eurozone is currently in a mild technical recession. Manufacturing activity has been contracting since the start of 2023, while services have started decelerating more visibly in recent months. So, as the impact of past rate increases feeds through to the economy and further slows inflation, rate cuts in the eurozone could come from mid-year or even somewhat earlier. That said, markets have largely anticipated the central banks’ moves and, likely, are now extrapolating too many rate cuts too soon.

“At the time of writing, market pricing for the European Central Bank is six rate cuts before year-end, starting in March. This implies that government bond yields have probably overshot to the downside in the short term. But, on a six to12-month horizon, bonds are a good hedge against recession.”