The economic landscape of Europe is marked by a delicate balance as recent inflation data presents a mixed picture, particularly in France and Germany.
While French inflation has unexpectedly remained steady, data from German regions indicates a slowdown, collectively prompting traders to increase their bets on the European Central Bank (ECB) implementing further interest rate cuts.
French prices remain stable: a surprise in the Eurozone
Consumer prices in France rose by 1.8% year-on-year in January, according to the statistics agency Insee, matching the reading from December.
This figure defied analysts’ expectations from a Bloomberg survey, which had predicted a 1.9% increase.
Meanwhile, German regional data revealed varied figures, with the country’s two largest states reporting inflation at 2% and 2.5%, respectively.
This divergent data suggests a complex landscape for the Eurozone’s monetary policy.
ECB reiterates disinflation progress amidst lingering services pressures
These figures come shortly after the ECB reduced its deposit rate by a quarter-point for the fourth consecutive meeting, bringing it down to 2.75%.
The central bank reaffirmed its assessment that the disinflation process across the continent is “well on track,” although they acknowledged persistent pressures within the services sector.
ECB policy stance poised for shift in March
As inflation levels move significantly away from the double-digit highs of 2022, officials are reportedly considering dropping the term “restrictive” to describe their policy stance as early as the next meeting in March.
This potential shift comes as the ECB attempts to strike a balance between taming inflation and supporting economic growth.
President Christine Lagarde has continued to avoid offering concrete guidance on borrowing costs this week but reaffirmed that a clear direction of travel is in place.
Market reaction: bets on further rate easing surge
In response to Friday’s inflation data, traders significantly increased their bets on further rate easing by the ECB.
Money markets are now pricing in 83 basis points of rate cuts in 2025, up from approximately 70 basis points earlier in the day.
Elsewhere, the euro experienced a 0.2% drop against the dollar, falling to $1.037, while European bonds rallied.
German two-year yields fell by nine basis points, reaching 2.12%, illustrating the market’s anticipation of a shift in monetary policy.
Upcoming data and consumer sentiment
Later on the same day, January’s inflation data for Germany as a whole is expected to remain steady at 2.8%.
The full 20-nation Eurozone report will be released on Monday, with a Bloomberg Economics nowcast indicating a potential acceleration to 2.6%.
However, an ECB survey of consumers released on Friday revealed caution remains necessary; expectations for inflation over the next 12 months increased for a third consecutive month to 2.8% in December, while remaining unchanged at 2.4% for three years ahead.
Forecasts and wage growth
Professional forecasters have also increased their estimates for price growth this year, according to another poll by the central bank, although longer-term expectations remain anchored around 2% through 2027.
Further, data suggests that slower growth in workers’ pay should aid in keeping inflation in check; a separate ECB survey indicated that companies expect wage gains to ease in both 2025 and 2026.
ECB official sees inflation target within reach
“The momentum of price increases in the euro area is fading,” ECB Governing Council member Madis Muller stated in a blog post on Friday.
It is entirely realistic that by the middle of this year, price increases in the euro area will be very close to the central bank’s target of 2%.
In France, price increases were driven by increases in energy and manufactured goods.
The services gauge slowed to 1.9%, marking its lowest reading in more than three years.
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