Low inflation in Germany and France fuels hope for lower interest rates

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Low inflation in Germany and France has raised investors' hopes that the European Central Bank will cut borrowing costs soon – even though rapid wage growth pushed up service prices at the start of the year.

Consumer prices in Germany rose by 3.1 percent in the year to January, according to data published by the Federal Statistics Agency on Wednesday. That represents a slowdown from 3.8 percent in December and below economists' expectations in a Reuters poll of 3.2 percent for January.

There is a similar trend in French inflation, which fell to a two-year low of 3.4 percent at the start of the year, giving investors hope that the European Central Bank could start cutting its benchmark deposit rate from the current record level of 4 percent. . By April.

Price pressures have eased rapidly since Russia's invasion of Ukraine, and the lifting of coronavirus lockdowns has led to the biggest rise in living costs in Europe in a generation.

The eurozone's two largest economies reported sharp declines in inflation rates in energy and goods, but they also saw jumps in prices for labour-intensive services. This is likely to concern interest rate setters at the European Central Bank, who have said they want to see wages moderate before cutting borrowing costs.

Markets reacted as two-year German government bond yields fell 0.08 percentage point to 2.44 percent on Wednesday, with declines reinforced by weaker-than-expected US jobs data. Investors believe that lower inflation increases the likelihood that the European Central Bank – which targets inflation at 2 percent – will cut interest rates by April.

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“There is still another inflation release to consider before the ECB meeting in March, but the January figures make us more confident in our expectations that the first rate cut will be,” said Andrew Kenningham, an economist at consultancy Capital Economics. In April.

Joachim Nagel, head of the Bundesbank and one of the most hawkish members of the European Central Bank's governing body that sets interest rates, added to these hopes by speaking at an event in Berlin on Tuesday before the latest data was published that he was “convinced that we have tamed the greedy beast.” [of inflation]”.

Euro zone price data to be published on Thursday is expected to show that inflation in the single currency bloc slowed to 2.8 percent in January – down from 2.9 percent the previous month.

However, European Central Bank President Christine Lagarde sounded a cautionary note on inflation and the possibility of interest rate cuts. “We're not there yet [on inflation]. “We need all kinds of data, one of which is very important,” she said in an interview with CNN on Tuesday evening. “It's the data on wages.”

The European Central Bank expected wage growth to slow from 5.3 percent last year to 4.8 percent this year, and several policymakers said they wanted to see evidence from this year's collective wage agreements with unions that labor costs are moderating.

Germany's core annual inflation rate, excluding more volatile energy and food prices, fell to 3.4 percent. However, utility prices accelerated slightly to rise by 3.4 percent in January.

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French inflation in January fell 0.7 percentage points from December, but remained slightly above economists' expectations of 3.3 percent.

French statistics agency Insee said energy price inflation slowed sharply to 1.8 percent, and goods inflation slowed to 0.7 percent. Food price growth slowed to 5.7 percent. But prices for services, which make up half of the inflation basket, accelerated slightly to 3.2 percent, and tobacco prices rose sharply.

The International Monetary Fund said on Tuesday that inflation was falling “faster than expected” in much of the global economy, allowing central banks to begin cutting borrowing costs, which it said may be necessary in some parts of the world “to avoid protracted economic weakness.” – Failure to achieve inflation targets.

The euro zone economy underperformed most of the world after the bloc's gross domestic product stagnated in the fourth quarter and expanded by just 0.5 percent over the whole of 2023, figures released on Tuesday showed. The United States grew by 2.5 percent last year and China estimated its annual growth. Growth was 5.2 percent.

Additional reporting by Mary McDougall

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