Falling French inflation boosts hopes of an end to euro zone rate rises

German bonds rally and euro falls against dollar as investors see ‘clear signs of disinflation’ in Europe

Annual inflation in France fell to 6 per cent, its lowest level for a year, boosting hopes that a swift easing of euro zone price pressures will allow monetary policymakers to stop raising interest rates soon.

Coupled with falling German regional inflation and Spanish price growth also dropping more than forecast to almost a two-year low, the decline in French inflation in May lifted economists’ expectations that the European Central Bank may stop increasing rates by July.

Investors responded by scaling back their bets on how much higher the ECB will raise rates. Germany’s rate-sensitive two-year bonds rallied, while the euro fell 0.6 per cent against the dollar to $1.0675 (€1), its lowest level for more than two months.

“We now see clear signs of disinflation in the euro zone,” said Claus Vistesen, economist at research group Pantheon Macroeconomics. “Investors should brace for a change in tune at next month’s meeting [of the ECB], setting the stage for the hiking cycle to end in July.”


As 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 per cent. It is expected to increase the rate by another quarter percentage point to 3.5 per cent when it meets in two weeks.

Luis de Guindos, vice-president of the ECB, said on Wednesday that the latest data was “positive news”. But he pointed out that underlying inflation, which strips out energy and food prices, remained high, adding: “Has the battle been won? I would not say that.”

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

Ignazio Visco, the governor of Italy’s central bank who sits on the ECB’s governing council, noted that core inflation was “still high”, after falling from 6.7 per cent in April to 6.5 per cent. The ECB had a “tough challenge” to bring inflation down to its 2 per cent target without causing an “excessive brake on consumption and investment”, he added.

In Belgium, headline inflation fell to an 18-month low, but core price growth still accelerated from 8.3 per cent in April to 8.7 per cent in May.

Price pressures, however, eased more than expected in North Rhine-Westphalia, Germany’s most populous region, where inflation fell from 6.8 per cent in April to 5.7 per cent. Economists said this meant overall German inflation was also likely to drop more than forecast when national data was released on Wednesday afternoon.

In France, price growth slowed in May across almost all areas except tobacco, according to the national statistics institute. Energy inflation fell from 6.8 per cent in April to 2 per cent in May, while food inflation dipped from 15 per cent to 14.1 per cent. Price growth in manufactured goods and services also eased.

François Villeroy de Galhau, France’s central bank governor and ECB council member, said the fall in inflation from 6.9 per cent to below the 6.4 per cent level forecast by economists polled by Reuters was “a step in the right direction” and boosted his confidence that France would reach the 2 per cent target by the end of next year. Pantheon estimated that core French inflation fell from 4.7 per cent in April to 4.4 per cent in May.

Euro zone inflation is expected to fall from 7 per cent in April to 6.3 per cent in May, when those figures come out on Thursday, according to a Reuters poll of economists.

But the ECB is focused on core inflation, which policymakers have said they want to see fall towards its 2 per cent target before they stop raising rates. This measure is expected to dip only slightly to 5.5 per cent in May. – Copyright The Financial Times Limited 2023