Recent inflation figures in France and Germany, especially, paint a picture of a mixed economy.
The French Inflation has been unexpectedly stable, but data from German areas indicate a slower pace. This, combined, is causing traders to bet more on further rate reductions by the European Central Bank.
French prices stay stable: A surprise for the Eurozone
According to the statistics agency Insee the consumer prices rose in France by 1.8% on an annual basis in January. This is the same as the December reading.
Bloomberg’s survey of analysts had forecast a 1,9% rise.
Inflation rates in Germany’s regions are also varied. The two biggest states reported a rate of 2% inflation and 2.5% respectively.
These divergent figures suggest a complicated landscape in the Eurozone for monetary policy.
ECB reiterates disinflation progress amidst lingering services pressures
The ECB has just reduced the deposit rate for the 4th consecutive time by a quarter point, bringing the figure down to 2.75%.
Although they recognized persistent pressures in the service sector, the central bank reiterated its assessment that disinflation is well underway across the continent.
The ECB’s policy stance is poised to change in March
Officials are considering removing the word “restrictive”, which they use to describe the policy, as soon as their next meeting takes place in March.
The ECB is trying to find a way to balance taming the inflation with supporting economic growth.
This week, President Christine Lagarde continued to refrain from providing concrete advice on borrowing costs but reiterated that there is a clear path of travel.
Bets on rate cuts surge in market reaction
The traders have increased bets significantly on the ECB easing rates in response to last Friday’s data.
The money markets now price in an 83 basis point rate cut in 2025. This is up from 70 basis points the previous day.
The euro fell 0.2% against the US dollar to $1.038, while European bonds rose.
The yields on German 2-year bonds fell nine basis points to 2.12 percent, showing that the market is anticipating a change in monetary policies.
Consumer sentiment and upcoming data
On the same date, it is anticipated that Germany’s overall inflation rate for January will remain at 2,8%.
Bloomberg Economics’ nowcast indicates that the Eurozone will accelerate to 2,6%.
A survey by the ECB of consumers, released Friday, revealed that caution is still necessary. Expectations for inflation in the coming 12 months rose for a 3rd consecutive month, to 2,8%, and remained unchanged for three years, at 2,4%.
Forecasts of wage growth
According to a second survey by the Central Bank, professional forecasters also raised their expectations for price increases this year. However, longer-term predictions remain at around 2% until 2027.
A separate ECB study indicated that employers expect wages to decline in 2025 as well as 2026.
Official of the ECB believes inflation targets are within reach
Madis Müller, ECB Governing Council Member and blogger on Friday stated that “the momentum of the price increase in the Euro Area is fading”.
By the middle of the year, it is realistic to expect that the price increase in the Eurozone will reach very near the 2% target set by the Central Bank.
The price increase in France was mainly due to increases in the cost of energy and manufactured products.
This is the lowest level in over three years.
The post French inflation stalls fuels bets for ECB rate reductions may be updated as new information becomes available
This site is for entertainment only. Click here to read more
