ECB Rate Cut Hopes Rise As German And Spanish Inflation Eases

Declining inflation in Germany and Spain signals a potential shift in ECB monetary policy, amidst a broader trend of easing eurozone inflation.

What does the drop in German and Spanish inflation mean for ECB rate cuts?

November's German inflation rate dropped unexpectedly to 2.3%, significantly below forecasts and fuelling speculation about potential European Central Bank (ECB) rate cuts. This decrease, reflecting a similar trend in Spanish inflation, suggests that overall eurozone inflation may also fall below expectations. Notably, Goldman Sachs revised its eurozone annual price growth prediction from 2.9% in October to 2.5% in November.

Carsten Brzeski, global head of macro research at ING, emphasized the widespread nature of disinflation across the eurozone. He cautioned the ECB against underestimating this disinflationary trend, drawing parallels to their previous oversight of inflation momentum.

Germany's federal statistical agency reported a significant slowdown in consumer price growth across all categories. The harmonized rate of inflation in the eurozone's largest economy reached a more than two-year low, declining from 3% in October and a peak of 11.6% a year ago.

Shift In Monetary Policy: ECB and BoE Likely To Cut Rates Sooner
Investors anticipate earlier interest rate reductions by the ECB and the BoE, driven by recent economic data.

Analysts noted the reduction in German services inflation from 3.9% to 3.4% in November as a positive sign of easing underlying price pressures. Tomasz Wieladek, economist at T Rowe Price, highlighted the potential implications of a broad-based slowdown in German services inflation for monetary policy.

German energy prices decreased by 4.5%, and food price growth slowed to 5.5%. The core inflation rate, excluding food and energy, dropped to 3.8% from 4.3%. These figures influenced market reactions, with investors leaning towards an earlier ECB rate cut. This anticipation drove Germany's two-year bond yield to a nearly six-month low and resulted in a slight depreciation of the euro against the US dollar.

Despite these developments, ECB policymakers, including German central bank head Joachim Nagel and ECB president Christine Lagarde, cautioned against premature optimism in achieving the 2% inflation target. The OECD's projection that the ECB won't initiate rate cuts until 2025 due to persistent price pressures adds to this cautionary stance.

Parallel to Germany, Spain also reported a decline in inflation for the first time since June. This decrease, driven by lower fuel and tourism prices, came as a surprise, with the harmonized index of consumer prices rising only 3.2% in November, below the 3.7% forecast. Core inflation in Spain also fell, dropping from 5.2% to 4.5%.

Martin Wolburg, economist at Generali Investments, described the data as dovish from a monetary policy perspective. However, he anticipates that the main factors driving disinflation, such as falling energy prices and slowing food inflation, will diminish next year, keeping German inflation above 2% throughout 2024.

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