Falling German and French inflation sparks hopes of an end to eurozone rate hikes

Inflation in Germany and France fell faster than economists expected to hit the lowest levels for at least a year, raising hopes that cooling price pressures will prevent monetary policymakers from raising eurozone interest rates too soon. will allow.

The drop in German annual inflation from 7.6 percent in April to 6.3 percent in May reflected a sharp slowdown in energy prices as well as lower inflation for food, other goods and services. Economists polled by Reuters had forecast the figure at 6.8 percent.

French inflation fell to 6 percent from 6.9 percent in May. Slower price growth in all sectors except tobacco dragged the French rate below the 6.4 percent level forecast by economists.

An easing of price pressures in the eurozone’s two biggest economies – as well as a larger-than-expected drop in Spanish inflation to a nearly two-year low – raised economists’ expectations that the European Central Bank would stop raising rates by July. Could

“We are now seeing clear signs of deflation in the eurozone,” said Claus Wittesen, economist at research group Pantheon Macroeconomics. “Investors should brace for changes at next month’s meeting (of the ECB), which will end the hiking cycle in July.”

Investors responded by lowering their bets on how high the ECB would hike rates. Germany’s rate-sensitive two-year bonds rose, while the euro fell 0.5 percent to $1.0684 against the dollar, its lowest in more than two months.

There are some signs that the ECB’s rate hike is starting to have an effect on restricting activity and cooling rapidly rising price pressures. The German economy has contracted for the past two quarters, while eurozone bank debt has been stable for six months.

US investment bank Evercore vice-chairman Krishna Guha said tighter monetary policy was “making its first impact on activity”, adding that he had detected “a marked change in tone among policy makers”.

Eurozone inflation is expected to fall from 7 percent in April to 6.3 percent in May, according to a Reuters poll of economists when the figures are published on Thursday.

But the ECB is focused on core inflation, which separates energy and food prices, and policymakers have said they want to see the measure fall towards its 2 percent target before stopping rate hikes. If core inflation falls more than modestly to 5.6 percent in April, as economists expect, it could allow the ECB to hold off on raising rates this summer.

Since energy and food prices soared last summer, the ECB raised its deposit rate by an unprecedented amount from a record low of minus 0.5 percent. The rate is expected to rise another quarter percentage point to 3.5 percent when it meets in two weeks.

ECB Vice President Luis de Guindos said on Wednesday that the latest data was “positive news”. But core inflation is still a concern, he said: “Has the battle been won? I wouldn’t say that.”

There were still signs of persistent price pressures in other parts of Europe’s 20-nation single currency bloc. Italian inflation fell, but less than expected, to 8.1 percent in May from 8.7 percent in April. Economists had predicted it to fall to 7.2 per cent.

Italy’s central bank governor Ignazio Visco, who sits on the ECB’s Governing Council, noted that core inflation was “still high” after falling to 6.5 percent from 6.7 percent in April. He said the ECB faced a “stiff challenge” of getting inflation down to its 2 percent target “without putting too much of a brake on consumption and investment”.

Headline inflation in Belgium fell to an 18-month low, but core price growth still rose from 8.3 percent in April to 8.7 percent in May.

Germany’s federal statistics office said government subsidies helped ease energy inflation from 6.8 percent in April to 2.6 percent in May, while a decline in services inflation from 4.7 percent to 4.5 percent was “probably partly” due to Due to launch. A subsidized €49 monthly public transport ticket.