The Zhitong Finance App learned that the Eurozone economy has shown resilience beyond market expectations, strengthening the market's expectations that the ECB will raise interest rates again in December. According to data released by Eurostat on Friday, the gross domestic product (GDP) of the 21 member countries in the Eurozone increased 0.4% month-on-month in the third quarter, in line with the preliminary estimates announced at the end of October. The growth rate was double what analysts expected at the time. However, economic growth slowed from 0.6% in the second quarter, indicating that although the Eurozone economy is resilient, the recovery momentum is not continuing to increase.
Judging from the performance of major economies, growth within the Eurozone is still clearly divided. Spain's third-quarter GDP grew 0.6% month-on-month, Germany grew 0.2% month-on-month, Italy remained basically flat, while the French economy contracted 0.1% month-on-month. This means that the overall economic growth of the Eurozone has yet to translate into a simultaneous recovery for all member states, and some large economies are still under great pressure.
At the same time, inflation data has further increased the ECB's policy pressure. According to preliminary data released by Eurostat on November 4, the Eurozone Harmonized Consumer Price Index rose 4.0% year on year in October, up from 3.8% in September, and reached double the ECB's 2% target level. Among them, energy prices rose 20.8% year on year, further accelerated from 18.9% in September; service prices rose from 3.2% to 3.3%, while food, alcohol and tobacco prices rose from 1.3% to 1.6%.
Notably, the core inflation rate after excluding energy, food, alcohol, and tobacco also rose from 2.5% in September to 2.5% in October; the inflation rate remained at 2.3% after excluding energy. This shows that although energy prices are the main driving force behind the current inflationary rebound, service prices and some non-energy commodity prices are still sticky, and inflationary pressure is not entirely limited to the energy sector.
Changes in inflation expectations are also worth watching. According to the fourth quarter professional forecast survey released by the ECB on October 30, respondents raised their forecasts for overall inflation and core inflation in 2026 and 2027 due to rising energy prices and their indirect effects. Among them, the overall inflation rate in the Eurozone is expected to reach 3.0% in 2026 and 2.6% in 2027, up 0.3 and 0.4 percentage points respectively from the previous survey; the core inflation rate is expected to be 2.4% in 2026 and rise to 2.5% in 2027. However, respondents still expect long-term inflation expectations to stabilize at 2.0%, which means that the market currently does not generally believe that inflation will get out of control for a long time.
Against the backdrop of both economic growth and inflation showing resilience, market expectations for the ECB's interest rate hike in December have clearly heated up. According to a survey released on November 12, all 71 economists surveyed expect that the ECB will raise interest rates by 25 basis points at the December meeting to raise deposit interest rates from the current 2.50% to 2.75%. If this expectation is fulfilled, deposit interest rates will rise to what some economists consider to be the upper end of the neutral interest rate range, which means that monetary policy may shift further from moderately restrictive to a more binding level.
However, economists are still divided on the policy path after December. Of the 71 respondents, 46 expect the December rate hike to be the last action in the current austerity cycle; another 25 believe that the ECB may raise interest rates further in early 2027. At the same time, market pricing also shows that investors expect the ECB may increase interest rates two to three times by the end of 2027.
Economists raised their growth expectations, which also gave the ECB room to continue to tighten its policies to a certain extent. According to the survey, respondents expect the Eurozone economy to grow by 1.1% in 2026 and 1.3% in 2027.
For the ECB, the most critical question now is the extent to which energy price shocks will evolve into sustained inflation. The war in the Middle East will not only directly drive the prices of oil, gas, and electricity on the plateau, but may also gradually raise enterprise costs through transportation, chemicals, manufacturing, and food production. If companies pass on rising costs to consumers, the energy shock could evolve from short-term supply disturbances to broader price pressures. Especially when service prices are still sticky, the ECB needs to be wary that rising energy prices will trigger rising wage requirements and inflation expectations, which in turn will have a second round of inflation.
Energy supply and winter demand will be important variables to watch in the coming months. The level of natural gas stocks in Europe, winter temperatures, the supply of liquefied natural gas, and whether the situation in the Middle East deteriorates further may affect energy price trends. If the Iran war continues to disrupt global energy trade, or if winter heating demand is higher than expected, gas and electricity prices may rise again, forcing the ECB to take a tougher policy stance. Conversely, if regional conflicts ease and energy supply is restored, a fall in energy inflation may reduce the need for further interest rate hikes.
Wages and labor markets are also important factors in determining the ECB's policy path. Even if energy prices fall, if wage growth remains strong, companies may absorb labor costs by raising service prices, making it difficult for core inflation to quickly return to the target level of 2%. The ECB's fourth quarter professional forecast survey predicts that the Eurozone wage growth rate will be 3.3% in 2026 and 3.1% in 2027. Although the long-term level has slowed, we still need to pay attention to the relationship between wage growth and labor productivity. If wage growth continues to be higher than productivity growth, service sector inflation is likely to remain resilient.
The recent sharp rise in bond yields constitutes another important policy variable. Higher yields on government bonds will raise financing costs for businesses and households, thereby tightening the overall financial environment and stifling investment, consumption and economic growth. For eurozone member countries with heavy debt burdens, rising financing costs may also increase fiscal pressure and lead to further polarization of financial conditions among different countries. If the bond market continues to adjust, the financial environment may actually be tightening even if the ECB does not raise interest rates further. This will allow policymakers to more carefully assess the need to continue to raise interest rates to avoid excessive impact on the economy.
Furthermore, the divergence in economic performance within the Eurozone may also limit the ECB's room for action. The German economy grew by only 0.2% in the third quarter, Italy basically stagnated, while France experienced month-on-month contraction, while Spain and other economies maintained relatively rapid growth. It is difficult for a unified monetary policy to adapt to the economic conditions of all member countries at the same time. If energy prices remain high for a long time, while financing costs continue to rise, economies with a strong industrial base and high energy demand may be more clearly impacted, further exacerbating the growth gap within the Eurozone.
Judging from the ECB's policy framework, the current situation is making it face a typical dilemma: on the one hand, the inflation rate reached 4.0%, which is clearly above the 2% target, and core inflation and service prices have not shown a sufficiently clear cooling trend; on the other hand, although economic growth is better than expected, it is still expanding moderately, and rising bond yields and energy shocks may drag down economic activity in the next few quarters.
Bundesbank President Joachim Nagel said this week that policymakers may have to start taking measures to curb economic growth in order to meet inflation targets. This statement means that discussions within the ECB on further tightening policies are no longer limited to dealing with rising energy prices, but are beginning to consider whether it is necessary to limit demand to prevent inflation from deviating from the target for a long time.
The ECB's future policy decisions will still depend on various indicators such as energy price trends, core inflation, wage growth, economic activity, and financial conditions. The ECB also needs to determine whether the current rise in inflation is mainly due to a temporary energy supply shock, or whether it has already begun to spread to a wider range of prices for goods and services.
Overall, the Eurozone's GDP performance in the third quarter was stronger than expected, the inflation rate rose to 4.0% in October, and economists' increases in future inflation forecasts all strengthened the reasons for the ECB to raise interest rates again in December. The current mainstream expectations of the market and economists clearly favor an interest rate hike of 25 basis points, but whether this round of interest rate hikes will be the last action in this austerity cycle still depends on whether the energy shock can be mitigated in the next few months, whether core inflation continues to stick, and whether the damping effect of rising bond yields on the economy is further evident.