Investors boosted bets on the peak for European Central Bank interest rates to 4% for the first time after inflation in France and Spain came in unexpectedly hot.
(Bloomberg) — Investors boosted bets on the peak for European Central Bank interest rates to 4% for the first time after inflation in France and Spain came in unexpectedly hot.
Consumer prices in France jumped by a euro-era record 7.2% from a year ago in February as food and services costs increased. Spain saw a 6.1% advance. Analysts had estimated price gains would remain unchanged at 7% in France and slow in Spain.
The stronger readings from the euro zone’s second- and fourth-biggest economies will cement the half-point rate move the ECB is planning for March and bolster those officials who say more big moves are needed beyond that to get inflation under control.
Investors have been betting on an extended monetary-tightening cycle from the ECB, pricing out the risk of cuts this year and wagering the deposit rate will continue to climb into 2024.
Traders have now cranked up bets on the so-called terminal rate from 3.5% at the start of the year, jolted also by worse-than-anticipated price data out of the US. The ECB’s deposit rate, currently 2.5%, has never been as high as 4%.
Wherever it ends up, it may stay there for a while. Chief Economist Philip Lane told Reuters in remarks published earlier Tuesday that officials may hold borrowing costs at a high level for some time once they hit the peak.
“It will take time to return to what we’ve seen” previously on inflation, ECB Governing Council member Boris Vujcic said Tuesday in Luxembourg. “My main worry is not where inflation is going to be, but how persistent it will be.”
Ahead of March’s meeting, policymakers will pore over figures from across the continent this week, with stubborn underlying price pressures their current focus, even as the headline number for the 20-nation bloc retreats. Euro-area data are due Thursday, with economists predicting a pullback to 8.3% from 8.6%.
What Bloomberg Economics Says…
“The increase in Spain’s headline EU harmonized inflation is another reminder that the path of price growth will be choppy and sticky on its way down, as underlying price pressures remain strong. While base effects will dominate over the next few months, bringing inflation meaningfully down by the summer, we still expect it to end the year at above 5%.”
—Ana Andrade, economist. Click here for full REACT
As well as posing a challenge to the ECB, Tuesday’s data will worry politicians — despite the French and Spanish numbers still being among the euro area’s lowest.
The biggest price spike in a generation is becoming an increasingly difficult challenge for French President Emmanuel Macron, who’s already facing mass protests over his plans to overhaul pensions.
While his government spent vast sums containing last year’s initial energy-price shock, stresses on public finances have forced it to wind back some support. At the same time, inflation is spreading to goods and services where the state can less easily intervene.
Many French consumers are cutting back on their spending in response to the jump in prices, with 55% using their cars less, 51% buying fewer clothes and 50% going out less often, according to a study by NielsenIQ. Among those between 18 and 35, 30% have stopped having breakfast everyday, NielsenIQ said.
Bank of France chief Francois Villeroy de Galhau reckons soaring prices are nearing their peak. After next month’s likely 50 basis-point rate increase, there’ll be less “urgency” for the ECB to act, he said this month.
In Spain, Prime Minister Pedro Sanchez’s government will come under more pressure to keep a lid on prices in an election year in which he’s widely expected to seek another term.
–With assistance from Joel Rinneby, Ainhoa Goyeneche, Ben Sills and Stephanie Bodoni.
(Updates with ECB’s Vujcic in seventh paragraph.)
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