The Eurozone's harmonized CPI in November rose to 2.3% year-on-year, returning above the central bank's target. Is a 25 basis point rate cut in December "set in stone"?

In November, the Eurozone's CPI returned above the central bank's target, alleviating some deflation concerns; the core CPI was better than expected, and the market has fully priced in the expectation of a 25 basis point rate cut by the European Central Bank (ECB) in December.

On Friday evening, the European Union's statistics office released data showing that the Eurozone's harmonized CPI in November rose slightly to 2.3% year-on-year, exceeding the ECB's 2% target, in line with market expectations. Previously, due to the diminishing deflationary effects of energy prices, the Eurozone's CPI had risen for two consecutive months after falling to 1.7% in September.

The harmonized CPI fell by 0.3% month-on-month in November, after rising by 0.3% in October, while a decrease of 0.2% was expected.

Meanwhile, the core harmonized CPI, which excludes volatile energy, food, alcohol, and tobacco prices, remained at 2.7% for the third consecutive month (year-on-year growth), but slightly below the expected 2.8%.

"The inflation data is quite good," said Luis de Guindos, Vice President of the ECB, later commenting that the acceleration in inflation was expected. The EU statistics office stated that although service costs have slightly decreased, they remain high, and non-energy industrial goods prices have risen for the second consecutive month.

After the data was released, European stocks and the euro-to-dollar exchange rate showed almost no short-term changes.

Is a 25 basis point rate cut in December a certainty?

The market has fully anticipated that the ECB will cut rates by 25 basis points in December, and if this expectation materializes, it will be the ECB's fourth rate cut this year.

Since October, as the economic growth outlook for the Eurozone has improved and inflation has rebounded, expectations for the central bank to be forced to cut rates further by 50 basis points have significantly cooled. High-ranking officials, including Isabel Schnabel, a member of the ECB's Executive Board, have emphasized that monetary policy easing must be cautious.

The ECB's next monetary policy meeting will be held on December 12, and the latest macroeconomic forecasts released before this meeting will be a decisive factor in the outcome.

The central bank will also weigh the potential global impact of Donald Trump's return to the U.S. presidency, including whether he will fulfill his threats regarding universal trade tariffs and how this will affect EU exports.

On Friday, Yannis Stournaras, ECB Governing Council member and Governor of the Bank of Greece, stated that if there is evidence that U.S. tariffs will lead Europe into recession, it is likely that "we will adopt a more aggressive rate-cutting policy."

Stournaras indicated that in such a scenario, the final interest rate level could even be below 2%, and that the "most likely outcome" of the December meeting is a 25 basis point rate cut. He noted that the possibility of a 50 basis point cut cannot be ruled out, but this would be an "extreme" scenario, just as not cutting rates at all would also be an extreme scenario In addition, analysts tend to expect a 25 basis point rate cut in December.

Kyle Chapman, a foreign exchange market analyst at Ballinger Group, stated that the rise in inflation is entirely attributed to the volatility of energy prices, and the European Central Bank is optimistic about the 0.9 percentage point month-on-month decline in service sector inflation.

Chapman said, "Given the weak economic growth outlook, it is undoubtedly the case that inflation will continue to fall to 2% next year." He added that, nevertheless, the market seems to have priced in a 25 basis point expectation for December.

He also pointed out, "The (Eurozone) economy has not yet fallen off a cliff, and there is uncertainty regarding the neutral interest rate level, so there is no urgent need to start cutting rates early."

Melanie Debono, a senior European economist at Pantheon Macroeconomics, stated that the slight uptick in inflation data, the record low unemployment rate in the third quarter, and the higher-than-expected negotiated wage increases will prevent the European Central Bank from cutting rates by 50 basis points in December.

Debono noted that the final monetary policy decision will still be "touch and go," with the more dovish members of the European Central Bank strongly advocating for a 50 basis point cut. She added that if the central bank insists on a 25 basis point cut, it is likely to implement the same magnitude of cuts in its meetings in January and March next year