Rising inflation in France and Spain raises concerns about ECB rate hike

Inflation rebounded in France and Spain in February, sending borrowing costs for European governments up as doubts grew about how quickly the European Central Bank would stop raising interest rates.

French consumer prices rose 7.2% in the year to February, reaching the highest level since the introduction of the euro in 1999 as prices of food and services rose faster. Economists polled by Reuters had expected French inflation to stall at 7% in January.

Spain’s consumer price growth in February speed up to 6.1 percentrose from 5.9% in January and beat economists’ expectations for a drop to 5.5%, even though the government cut food taxes in January.

European government bond prices fell on Tuesday, sending yields on Germany’s rate-sensitive two-year bonds up 0.08 percentage points to 3.15%, their highest since the financial crisis. 2008.

Figures suggest eurozone inflation could be more persistent than expected, ahead of the bloc’s February price growth data on Thursday, which economists expect to fall to 8, 1%, from 8.6% in January.

“There are clear risks to euro inflation in February,” said Jörg Krämer, chief economist at German lender Commerzbank.

Line chart showing Fixed Price: inflation picks up again in France and Spain

A sharp drop in wholesale energy prices after a mild winter and falling fuel consumption has helped euro zone inflation rapid decline from a record 10.6% in October. However, it remains unclear how the pace of price growth will slow relative to the ECB’s 2% target.

The ECB pledged to raise the deposit rate by half a percentage point at its meeting on March 16. That would bring the benchmark interest rate to 3%, up from minus 0.5% last July and swap market is pricing in a further increase of less than 4% by the end of the year.

ECB Chief economist Philip Lane said on Tuesday that there was still a chance rates would rise another 0.5 percentage point in March despite “significant evidence that monetary policy is in effect”. and forward-looking indicators suggest that price pressures are easing.

“We all agree on the criterion that enough progress in core inflation is important,” Lane told Reuters, suggesting that the ECB would need to see a pace of price increases. slowdown in goods and services as well as energy and food before the rate hike stops. Even then, he said it would be “a pretty long time, a reasonable number of quarters” before it cuts rates.

French inflation was mainly driven by faster increases in food and service prices, while energy inflation fell despite a 15 per cent increase in regulated electricity tariffs this year. The country’s core inflation rate, which includes processed foods, has increased from 5.6% to 5.8%. France’s monthly consumer price growth accelerated to 0.9 percent, up from 0.4 percent in January.

Melanie Debono, an economist at the Pantheon Macroeconomics research group, said higher inflation in Spain was “surprising” after Madrid introduced a temporary tax cut package worth 10 billion euros. for staples, including bread, pasta, dairy products, fruit and vegetables.

Luis Planas, Spain’s agriculture minister, said he has seen signs that food prices will start to fall for too long. “We’re looking at all the costs that affect food production and we’re seeing that those costs are coming down.”

The government has urged participants from farmers to supermarkets to act “responsibly” by transferring savings to consumers.

A measure of Spain’s core inflation, which excludes energy and fresh food, rose 0.7% month-on-month and hit a record high of 7.7% in the year to February.

Debono added: “The likelihood of euro zone figures is even higher than our above consensus forecast on Thursday and therefore a 50 basis point ECB rate hike in May. , is increasing.

Additional reporting by Barney Jopson in Madrid


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