Europe’s markets are heading into the midweek period with inflation, growth, and trade all on their minds.
The UK’s price data was unexpectedly negative, thus strengthening the argument for a Bank of England interest rate cut. Sterling and equity markets moved in the opposite direction.
Other news included a closer relationship between Washington and Bern on the issue of trade. The EU also pushed forward with stricter rules for carbon borders. And new data from Germany showed how fragile Germany’s economy is as the year 2025 draws near.
UK inflation figures are unexpected
The UK inflation rate dropped sharply from 3.6% to 3.2%, the lowest since March. This is a significant drop compared with October’s 3.6% and well below forecasted 3.5%.
Prices of women’s clothes and food, such as biscuits, cakes, cereals and tobacco, were also lower.
This combination has increased expectations that Bank of England rates will be cut to 3.75% by Thursday.
The core CPI for services fell from 3.2% to just 4.4%. This indicates that the price pressures are easing as labor markets continue to weaken.
The markets now price in over 90% of the chance for a quarter point cut. A tight vote by MPC (5-4) is widely anticipated as Governor Bailey prepares to tackle further deflation.
The FTSE 100 rebounded, helped by the gains of banking stocks, as the sterling fell on this news.
BoE’s forecasts show inflation remaining above 2% through mid-2027. Recent budget measures, however, could move that date forward.
US-Swiss ‘tariff’ deal
US Trade Representative confirmed important tariff details in a trade framework agreement with Switzerland and Liechtenstein. The deal will apply retroactively to November 14, 2014.
Tariffs for imports will now be capped either at 15% or the rate of most-favorable-nation, which is a significant reduction from 39%.
Changes to the tax laws affect a variety of products including aircraft parts, generic drugs, agricultural goods and pharmaceuticals. However, there are still exemptions for gold, coffee, coffee, chemicals and some pharmaceuticals.
Swiss companies committed to invest $200 billion by 2028 in US, with a focus on pharmaceuticals, medical device, aerospace and gold manufacturing.
If talks fail, the two parties will review tariffs.
EU increases carbon border tax
The European Union will expand its Carbon Border Tariff (CBAM), which is the first border tax on carbon in the world, to include a wider range of goods.
This includes washing machines, fridges, construction material, components for the power grid, machinery and car parts. All of these downstream products rely on steel and aluminium.
Published by the European Commission, on 17 December, these draft proposals are intended to fill in any loopholes before full CBAM fees kick in on January 20, 2026 for imports of steel, cement and fertilizers.
The EU wants to stop firms from gaming the system by applying “default” emission values to foreign companies that do not report their carbon footprint. They are particularly interested in exporters from China.
It is important to stop producers sending goods with low carbon emissions to Europe, while continuing to produce high emission products elsewhere.
The EU claims that the tax is not meant to be protectionist. Instead, it aims at keeping the cost in line with EU prices and preventing carbon leakage.
The proceeds are expected to total EUR2.1 billion in 2030.
German confidence in business takes a blow
The Ifo Institute’s Business Climate Index fell unexpectedly in December from an updated 88.0 to 87.6.
This was below the expectations of a slight increase to 88.2.
The companies’ opinions on the current state of the economy remained unchanged at 85,6. However, their outlooks for the first quarter 2026 deteriorated, and expectations fell to 89.7. This is the lowest reading since May.
Construction remained at low levels. The decline was widespread, affecting manufacturing, trade and services.
Clemens Fuest, Ifo’s president, said that there were few signs of optimism in the final months of 2018.
These figures show how Germany has stagnated after two years of contraction in the economy and a tepid economic growth forecast for 2025.
The post Europe Bulletin: UK Inflation Cools Down, EU Carbon Rules Tighten Up, Germany’s Confidence Slumps could be updated as new developments unfold.
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