The Zhitong Finance App learned that data released on Friday showed that inflation in the Eurozone accelerated in November, and the most watched inflation sub-index was still high, which increased the reason for the ECB to cut interest rates more carefully next month.

According to Eurostat, consumer price inflation in the 20 Eurozone countries was 2.3% in November. This is higher than the 2.0% target of a month ago and the ECB's 2%, but in line with expectations.

Meanwhile, potential inflation, which the ECB is mainly concerned about when setting interest rates, stabilized at 2.7%, as a slight slowdown in service costs was offset by rising commodity inflation.

As the largest single service price increase in the consumer price basket, it has been hovering around 4% over the past year, and has slowed from 4.0% to 3.9% this month.

Service prices are often above the overall average, but policymakers believe a figure close to 3% is desirable as the drag on energy and imported goods will subside over time.

However, Friday's data did not change the overall situation, that is, next year's inflation will slowly fall back to the ECB's target on a more sustained basis, so a further 3.25% reduction in deposit interest rates is still necessary.

The key question now is whether 25 basis points of interest rate cut on December 12 is enough, or should we choose a larger 50 basis point.

Proponents of cutting interest rates by 25 basis points believe that service prices are still too high to give people peace of mind, while wages are still growing rapidly, supported by a record low unemployment rate. Even at low growth rates, they are in line with the “soft landing” scenario, which has always been the goal of the ECB.

Hawks like Bundesbank President Joachim Nagel say caution is needed. They warned against rushing to cut interest rates further due to service sector inflation, rising wages, and huge geopolitical uncertainty.

Executive Committee member Isabel Schnabel even said this week that borrowing costs are close to a neutral level, and currently it seems inappropriate to lower interest rates to stimulate the economy.

Meanwhile, supporters of drastic interest rate cuts say that the economy has not yet fallen into recession, so large-scale stimulus measures are needed to protect employment, because increased layoffs will curb already weak demand, leading to more layoffs, forming a self-reinforcing cycle.

The ECB's more dovish policymakers, such as Greek Central Bank President Yannis Stournaras and Portugal's Central Bank President Mario Centeno, are worried that a weak European economy could lead to inflation below the 2% target. They are strongly calling for a quick reduction of the current 3.25% deposit interest rate to 2% — a neutral level that they believe will neither limit nor stimulate economic growth.

Bank of France Governor Francois Villeroy de Galhau said on Thursday that the ECB may need to lower borrowing costs to expansionary levels to boost growth, echoing recent remarks by Bank of Italy President Fabio Panetta.

Investors seem to have similar concerns: a key market indicator that measures medium-term inflation expectations fell below 2% this week, for the first time since 2022.

However, although the dispute is unlikely to be resolved until policymakers receive the ECB's new economic forecast on the eve of the December 12 meeting, recently even dovish officials have put forward some reasons to gradually cut interest rates, implying that they may agree to cut interest rates by 25 basis points.

The ECB's new forecasts for economic growth and prices in December will be the key to determining the strength of policy relaxation. Although some officials believe that the 2% inflation rate will be reached in early 2025, the European Commission recently predicted that this will take longer.

Another reason is that until a new US administration takes office and policy ideas become actual policies, it is necessary to preserve some policy space, as these measures may have a significant impact on the global economy.

Trump's return has increased uncertainty. Although most ECB policymakers believe that trade tariffs will weaken economic growth in Europe, the impact on prices is unclear. Governor Lagarde said this week that “the trade war may bring a little bit of net inflation in the short term.”

Currently, the market has completely absorbed expectations of a slight interest rate cut, and believes that the possibility of further cutting interest rates by 50 basis points is less than 10%. However, market expectations have been unstable. After a particularly weak commercial survey last week, this probability was once close to 50%.

Regardless of the results on December 12, investors are betting that the ECB will cut interest rates steadily, and it is expected that policies will be relaxed at least at every meeting in June next year. By the end of 2025, deposit interest rates will drop to 1.75%, a level low enough to once again stimulate economic growth.