The November Inflation Mirage
Numbers do not lie. On November 28, 2025, the Eurostat flash estimate for Eurozone HICP (Harmonised Index of Consumer Prices) printed at 2.3 percent. This is a 30 basis point jump from October. The markets expected a cooling, but they received a reminder that energy base effects are a volatile master. While headline inflation flirts with the 2 percent target, services inflation remains the albatross around the European Central Bank neck. It is currently stuck at 3.9 percent. This sticky core figure is the primary reason the ECB Governing Council remains hesitant to pull the trigger on a larger 50 basis point cut in December.
The policy transmission is failing. Despite the deposit facility rate being trimmed to 3.00 percent in the October meeting, the real economy is not responding. According to the latest ECB HICP Dashboard, the divergence between southern periphery growth and northern stagnation has reached a ten year high. Germany is effectively the anchor dragging the Eurozone into a technical recession, with Q3 2025 GDP contracting by 0.1 percent.
Stagflation Risks in the Engine Room
The German manufacturing sector is in a state of managed collapse. The November PMI (Purchasing Managers Index) for German manufacturing came in at 41.2, well below the 50.0 expansion threshold. This is not a cyclical dip. It is a structural shift. High energy costs and the slow transition to EV infrastructure have crippled the industrial base. The ECB minutes released this week confirm that several members are concerned that keeping rates too high for too long will turn a soft landing into a hard crash.
The table below highlights the fragmentation within the bloc as of November 29, 2025.
| Economy | GDP Growth (Q3 2025) | Nov 2025 Inflation (Flash) | Unemployment Rate |
|---|---|---|---|
| Germany | -0.1% | 2.4% | 6.1% |
| France | 0.2% | 1.9% | 7.5% |
| Italy | 0.1% | 1.6% | 7.0% |
| Spain | 0.6% | 2.5% | 11.2% |
| Eurozone Total | 0.1% | 2.3% | 6.5% |
The 2.75 Percent Floor
Markets are currently pricing in a 78 percent probability of a 25 basis point cut at the December 12 meeting. This would bring the deposit rate to 2.75 percent. However, the internal rift within the ECB is widening. The hawks, led by the Bundesbank, argue that the recent uptick in November inflation justifies a pause. The doves point to the EUR/USD exchange rate, which has dipped toward 1.04, as a sign that the Eurozone is losing its competitive edge against a high rate US dollar environment.
If the ECB fails to cut, they risk a credit crunch in the first quarter of next year. Bank lending to non-financial corporations has already slowed to a crawl, growing at just 0.4 percent year on year. The cost of capital is still too high for a continent that is essentially not growing.
Visualizing the ECB Deposit Rate Descent
Transmission Failure and the Credit Crunch
The mechanism of monetary policy is broken in the current environment. Lowering the headline rate does little when commercial banks are tightening credit standards due to rising default risks in the SME sector. Per Reuters market data, corporate bond spreads for BB rated European firms have widened by 45 basis points since September. This suggests that the market is doing the tightening for the ECB, regardless of what Christine Lagarde decides in the Frankfurt tower.
Inflation is no longer the primary enemy. The enemy is a lack of investment. Total fixed capital formation in the Eurozone has been flat for three consecutive quarters. Without a significant reduction in borrowing costs, the 2026 outlook for private investment remains bleak. The ECB is currently operating with a neutral rate (r-star) estimate of 2.25 percent. This implies that even at 3.00 percent, the policy is still restrictive. The central bank is actively braking an economy that is already at a standstill.
The next critical data point for the Governing Council will be the December 18 release of the negotiated wage growth figures. If wage growth remains above 4.5 percent, the hawks will likely win the argument for a prolonged pause in early 2026. However, if wages show a sharp deceleration toward 3.5 percent, the path to a 2.00 percent deposit rate by mid 2026 is wide open. Watch the spread between the German 2 year and 10 year Bunds on December 19 for the first signal of market capitulation.
