The European Central Bank is heading towards an interest-rate rise in December after eurozone inflation climbed to a three-year high. Bundesbank President Joachim Nagel said a December increase was very likely necessary unless the inflation outlook improves markedly, and Bank of Italy Governor Panetta has also said a move may be needed. Eurostat's flash estimate put annual inflation at 4.0% in October, up from 3.8% in September.

Energy drives the rise

The increase has been driven largely by energy. Producer prices in the eurozone rose 11.1% from a year earlier in September, and ECB President Christine Lagarde has said the October inflation figure is mostly energy. Underlying price pressures, by contrast, have stayed muted so far. Capital Economics' Jack Allen-Reynolds noted that the energy spike has not yet had a substantial impact on domestic price pressures, while ING economist Carsten Brzeski said the December rise could also be the last one.

Markets price a December move

Money markets were pricing roughly a 72% probability of a December rise after the inflation data, slightly higher than before the release. The ECB held its deposit rate at 2.50% at its meeting on 29 October, and Lagarde said the data arriving before December would decide the next step. The Governing Council meets on 17 December, when it will also publish a fresh set of staff projections running through 2029. Lagarde has stressed the Council is not pre-committing to a particular path for rates, so the decision will rest on the inflation prints and growth data published in the coming weeks.