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A slowdown in French inflation to almost a two-year low has prompted investors to increase their bets on early interest rate cuts by the European Central Bank.
Weaker price pressures for French energy and manufactured goods helped to lower inflation in the eurozone’s second-largest economy to 3.4 per cent in the year to January, compared with 4.1 per cent the previous month, according to data published on Wednesday. The latest figure was slightly above the 3.3 per cent level forecast by economists in a Reuters poll.
Markets reacted by sending German two-year government bond yields down 0.04 percentage points to 2.47 per cent, indicating investors think the fall in inflation makes it more likely the ECB will start lowering its benchmark deposit rate from the current level of 4 per cent by April.
Before the data was published, ECB president Christine Lagarde sounded a note of caution on inflation and the prospect for rate cuts. “We are not there yet [on inflation]. We need all sorts of data, one of which is critically important,” she said in an interview with CNN broadcast on Tuesday night, saying. “It’s the data concerning wages.”
German inflation is also expected to slow, from 3.8 per cent in December to 3.2 per cent in January, when that data is released later on Wednesday. Price data to be published on Thursday is expected to show inflation in the wider eurozone slowed to 2.8 per cent in January, down from 2.9 per cent the previous month.
Melanie Debono, an economist at consultants Pantheon Macroeconomics, said the latest data from France and Spain — where inflation unexpectedly accelerated to 3.5 per cent in January in data published on Tuesday — were “consistent” with her forecast for a slowdown of eurozone inflation to 2.4 per cent in January.
Lagarde said after the ECB’s meeting last week that the “disinflation process is at work” and annual price growth was on track to continue fading towards its 2 per cent target over the course of this year.
The ECB has forecast wage growth will slow from 5.3 per cent last year to 4.8 per cent this year and several policymakers — including Lagarde — have said they want to see evidence from this year’s collective wage agreements with unions that labour costs are moderating.
Insee, the French statistics agency, said energy inflation slowed sharply to 1.8 per cent, as did goods inflation to 0.7 per cent. Food price growth decelerated to 5.7 per cent. But services prices that make up half the inflation basket accelerated slightly to 3.2 per cent and tobacco prices moved sharply higher.
The IMF said on Tuesday that inflation was falling “faster than expected” in much of the world, allowing central banks to start lowering borrowing costs, which it said might be needed in some parts of the world to “avoid protracted economic weakness” and an undershooting of inflation targets.
Figures released on Tuesday showed the eurozone economy was underperforming most of the world after the bloc’s gross domestic product stagnated in the fourth quarter and expanded only 0.5 per cent over the whole of 2023. The US grew 2.5 per cent last year and China estimated its annual growth was 5.2 per cent.
Source: Economy - ft.com
