Inflation in the eurozone fell for the second month in a row in December, but analysts do not expect the European Central Bank to change its tone.

According to preliminary Eurostat data released Friday, headline inflation, which includes food and energy costs, was 9.2% year on year in December. It comes after November’s headline inflation rate of 10.1%, which was the first slight decrease in prices since June 2021.

Following Russia’s invasion of Ukraine in February 2022, the eurozone economy has been put under enormous strain, with energy and food prices skyrocketing last year.

In order to combat rising prices, the European Central Bank raised interest rates four times in 2022, and it is expected to do so again this year. The bank’s main rate is currently 2%.

Despite new signs of easing inflation, analysts say it’s too soon to celebrate and don’t expect the region’s central bank to change course.

Interest rates will “get to 3(%) and probably have to hold there all year even as the recession becomes more apparent,” according to Hetal Mehta of Legal & General Investment Management.

It comes after ECB President Christine Lagarde said in December, “We’re not pivoting, we’re not wavering, we’re showing determination.” She went on to say that the bank has “more ground to cover.”

The European Central Bank cannot and will not base its policy decisions on volatile energy prices.

ECB Governing Council member and French Central Bank Governor Francois Villeroy de Galhau stated earlier this week that interest rates could peak this summer.

In December, the ECB also stated that it will begin reducing its balance sheet in March at a rate of 15 billion euros ($15.8 billion) per month until the end of the second quarter. This step should also alleviate some of the region’s inflationary pressures.

The central bank forecasted an average inflation rate of 8.4% for 2022, 6.3% for 2023, and 3.4% for 2024 at the time. The bank’s mandate is to strive for 2% headline inflation.

Inflation in Germany fell from 10% in November to 8.6% in December, according to data released earlier this week.

According to Carsten Brzeski, global head of macro at ING Germany, these figures “are not a relief, but rather a reminder that eurozone inflation remains primarily an energy price phenomenon.”

In Europe, energy prices have fallen in recent months. Natural gas prices, for example, were around 72.42 euros per megawatt hour on Friday, a significant drop from their peak of 349.90 euros per megawatt hour in August.

Energy continued to be the biggest driver of inflation in December, but it fell from previous levels. According to the most recent figures, energy costs fell from 34.9% in November to an estimated 25.7% in December.

“The ECB cannot and will not base its policy decisions on highly volatile energy prices. Instead, the central bank will, in our view, hike interest rates at the next two meetings by a total of 100 basis points,” Brzeski said in a note.

In a note this week, Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said he sees “little relief” in the inflation data, “which will keep the ECB on alert at the start of the year.” He anticipates two 50-basis-point rate increases in the first quarter.

In terms of national breakdown, the Baltic countries experienced the highest increases in inflation, at around 20%.

(Adapted from CNBC.com)

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