According to Société Générale, market expectations of rate cuts beginning in the first half of 2024 could be overblown, as core inflation measures within the broader European economy come home to roost with marginally higher inflation that will keep rate cuts from the European Central Bank (ECB) at bay.
Core and headline inflation could only drop to 2.5% by end-2024
The downward inflation momentum should continue in November and could add weight to the narrative that the ECB starts cutting rates in 1H24. However, we believe this narrative could well be turned on its head in early 2024, as governments unwind their energy support measures, and core proves to be sticky, resulting in core and headline only falling to 2.5% by end-2024.
Upside surprises to Brent meant energy has been much stronger in the near term than we had forecasted... the unwinding of the government support measures to alleviate the energy crisis, starting in December 2023 and ending in May 2024, should keep headline inflation around its current rates.
Markets are expecting headline inflation to return to 2% in late summer 2024, but we think they may be proven wrong.
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