Luis de Guindos, Vice-President of the European Central Bank, said that the recent rapid slowdown in inflation is likely to take a pause now. Meanwhile, he warned that the eurozone economy may have been in recession in the 4th quarter.
"The latest data point to an economic downturn in December, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term. In general, the future remains uncertain, and the prospects tilted to the downside," the policymaker said, adding that the economic weakness is widespread: construction and manufacturing industries have been particularly hard hit, and a downturn in the service sector is likely to follow in the coming months.
Meanwhile, Luis de Guindos believes that the current level of interest rates, if maintained for a "sufficiently long period", will help reduce inflation to the ECB's target level of 2%. However, market participants are already predicting at least five rate cuts this year, the first of which will occur in March or April.
According to the latest official data, the eurozone annual inflation accelerated in December (for the first time since April), mostly on technical factors, such as the end of some government subsidies and low energy prices getting knocked out of base figures. However, core inflation continued to decline and reached its lowest level since March 2022. According to the report, the consumer price index rose by 2.9% per year after rising by 2.4% per year in November. Economists had expected inflation to rise to 3.0% per annum. Meanwhile, on a monthly basis, the consumer price index increased by 0.2% compared with a 0.6% drop in November. Eurostat reported that the core consumer price index - energy, food, alcohol & tobacco - rose by 3.4% per year, as expected, after an increase of 3.6% per year in November.
According to ECB forecasts released in December, inflation will still be at 2.6% in the last quarter of this year, then hitting 2.0% in the third quarter of 2025 and eventually settling at 1.9%, which is below the ECB's target level (2%).