Investors are betting that the European Central Bank is increasingly likely to raise interest rates next month after Spanish inflation hit a three-month high in August while prices rose faster than expected in Germany’s most populous region.
The Spanish statistics office said the harmonised index of consumer prices rose at an annual rate of 2.4 per cent in August, which was up from 2.1 per cent in June but slightly below economists’ forecasts polled by Reuters.
However, consumer prices in North Rhine-Westphalia rose 5.9 per cent in the year to August, an acceleration from 5.8 per cent in July, the statistics office of the German federal state said on Wednesday using the national measure of inflation.
This sparked investor doubts over whether the harmonised index of consumer prices for the whole of Germany would be higher than the 6.2 per cent expected for August when that data comes out later on Wednesday, which would be down from 6.5 per cent in July.
“Overall, these data are slightly on the hawkish side, indicating that risks are now tilted to the upside for this week’s eurozone inflation data,” said Claus Vistesen, an economist at consultants Pantheon Macroeconomics.
In response, eurozone sovereign bonds sold off, sending the yield on Germany’s rate-sensitive two-year bond 8.3 basis points higher close to a one-month high of 3.1 per cent. Bond yields rise as their prices fall.
The sell-off reversed gains from late on Tuesday when weaker than expected US jobs data caused bond prices to rally as investors saw lower odds of another rate rise by the Federal Reserve.
Inflation in the overall eurozone is expected to fall from 5.3 per cent in July to 5.1 per cent when August data is released on Thursday. Policymakers at the ECB will also be watching the core rate of inflation, excluding energy and food prices, which is expected to fall from 5.5 per cent to 5.3 per cent.
In Spain, the national statistics office gave few details except to say higher energy inflation was a key factor in the rise of headline price growth. The country’s underlying rate of inflation, stripping out energy and fresh food prices, dipped to 6.1 per cent.
Jeroen Blokland, head of research at investment adviser True Insights, wrote on social media platform X that the smaller than expected fall in Spanish core inflation “will strengthen the inflation hawks at the ECB to push for another rate hike, risking a deeper recession later”.
The percentage of eurozone companies expecting to raise their prices increased in most sectors for the first time since last autumn, according to a monthly European Commission survey. Consumers’ price expectations over the next 12 months also rose by the most in more than a year, it found.
Adding to the gloomy outlook, the EU’s economic sentiment indicator dropped more than expected to its lowest level since August 2020. Eurozone businesses’ employment expectations also fell to their lowest level since April 2021, suggesting the region’s strong labour market could be about to weaken.
The more dovish members of the ECB governing council say inflation has already halved and more rate rises risk causing an unnecessarily painful recession. But the hawks argue price growth is too far above the bank’s 2 per cent target.
At its last policy meeting in July, the central bank left the door open for the first time in more than a year for a pause in its policy tightening at its next meeting on September 14. It has already increased its benchmark deposit rate nine consecutive times from minus 0.5 per cent to 3.75 per cent.
Economists say next month’s decision is a “coin toss” that could depend on how much core eurozone inflation falls in August.
Source: Economy - ft.com
