Falling French inflation fuels investor bets on early ECB rate of interest lower

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A slowdown in French inflation to nearly a two-year low has prompted traders to extend their bets on early rate of interest cuts by the European Central Financial institution.

Weaker worth pressures for French vitality and manufactured items helped to decrease inflation within the eurozone’s second-largest financial system to three.4 per cent within the yr to January, in contrast with 4.1 per cent the earlier month, in response to knowledge printed on Wednesday. The most recent determine was barely above the three.3 per cent degree forecast by economists in a Reuters ballot.

Markets reacted by sending German two-year authorities bond yields down 0.04 share factors to 2.47 per cent, indicating traders suppose the autumn in inflation makes it extra doubtless the ECB will begin reducing its benchmark deposit charge from the present degree of 4 per cent by April.

Earlier than the information was printed, ECB president Christine Lagarde sounded a observe of warning on inflation and the prospect for charge cuts. “We’re not there but [on inflation]. We’d like all kinds of knowledge, considered one of which is critically necessary,” she mentioned in an interview with CNN broadcast on Tuesday evening, saying. “It’s the information regarding wages.”

German inflation can be anticipated to gradual, from 3.8 per cent in December to three.2 per cent in January, when that knowledge is launched afterward Wednesday. Worth knowledge to be printed on Thursday is anticipated to indicate inflation within the wider eurozone slowed to 2.8 per cent in January, down from 2.9 per cent the earlier month.

Line chart of Harmonised index of consumer prices (annual % change) showing Inflation is falling towards the ECB’s target

Melanie Debono, an economist at consultants Pantheon Macroeconomics, mentioned the newest knowledge from France and Spain — the place inflation unexpectedly accelerated to three.5 per cent in January in knowledge printed on Tuesday — have been “constant” along with her forecast for a slowdown of eurozone inflation to 2.4 per cent in January.

Lagarde mentioned after the ECB’s assembly final week that the “disinflation course of is at work” and annual worth development was on monitor to proceed fading in direction of its 2 per cent goal over the course of this yr. 

The ECB has forecast wage development will gradual from 5.3 per cent final yr to 4.8 per cent this yr and several other policymakers — together with Lagarde — have mentioned they wish to see proof from this yr’s collective wage agreements with unions that labour prices are moderating.

Insee, the French statistics company, mentioned vitality inflation slowed sharply to 1.8 per cent, as did items inflation to 0.7 per cent. Meals worth development decelerated to five.7 per cent. However companies costs that make up half the inflation basket accelerated barely to three.2 per cent and tobacco costs moved sharply larger.

The IMF mentioned on Tuesday that inflation was falling “quicker than anticipated” in a lot of the world, permitting central banks to begin reducing borrowing prices, which it mentioned is likely to be wanted in some components of the world to “keep away from protracted financial weak point” and an undershooting of inflation targets.

Figures launched on Tuesday confirmed the eurozone financial system was underperforming many of the world after the bloc’s gross home product stagnated within the fourth quarter and expanded solely 0.5 per cent over the entire of 2023. The US grew 2.5 per cent final yr and China estimated its annual development was 5.2 per cent.

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