Rising inflation challenges ECB rate cut expectations in Europe

Inflation across Europe is anticipated to rise, challenging expectations for the European Central Bank (ECB) to reduce interest rates by March.

French data shows inflation increased to 4.1% in December, influenced by reduced energy subsidies. In Germany, inflation is also expected to climb, with predictions of a jump to 3.8% from 2.3% in the previous month.

This trend counters a six-month period of declining consumer price growth in the eurozone, nearing the ECB’s 2% target. However, the end of government subsidies on utilities and food in Europe is likely to accelerate annual inflation rates. In Germany, for instance, the cessation of subsidies and tax increases to address a budget shortfall could further inflate prices.

Eurozone-wide figures are expected to reflect a rise in inflation from 2.4% to 3% in December. Investors are closely watching these developments to predict the ECB’s rate-cutting timeline. Swap markets suggest about 1.6 percentage points of ECB rate cuts this year, with a 60% chance of cuts starting in March.

Despite these market expectations, the ECB forecasts a slight inflation increase early this year, projecting a gradual return to its 2% target by 2025.

© 2024 funds europe

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