The latest data on the dynamic of the inflationary process in Spain and France have become the driving force behind the intensification of the spread of expectations among investors and economists that the European Central Bank will accelerate the implementation of measures to ease its monetary policy strategy.
It is worth noting that the mentioned financial regulator has already started easing monetary policy. In June, the European Central Bank cut the record-high deposit rate by 25 basis points. It is worth noting that this was the first decision on monetary policy easing made by the mentioned financial regulator in the last five years. In September, the European Central Bank again cut the deposit rate by 25 basis points. Currently, the corresponding figure is 3.5%.
The expectation is spreading among economists and investors that the European financial regulator will accelerate the implementation of measures aimed at easing monetary policy. The corresponding sentiment strengthened significantly and turned out to be on the trajectory of intensive scaling after on Friday, September 27, published data according to which in the current month in France consumer prices showed an increase of 1.5% year-on-year. It is worth noting that the corresponding indicator is below the European Central Bank’s 2% inflation target. The dynamic of consumer prices in France is largely due to a decrease in the cost of energy. It is also worth noting that this indicator was below the 2% mark for the first time in more than three years.
Also, expectations for an acceleration in the pace of monetary easing by the European Central Bank were boosted by data according to which inflation decreased to 1.7% on fuel, power, and food in Spain in September.
It’s worth noting that analysts interviewed by the media predicted that the mentioned figure in both specified countries would be fixed at 1.9%. Also, a separate survey conducted by the European Central Bank testified that most consumers, within the framework of their vision of the dynamic of prices in the future, expect that in the coming years, the intensity of growth of the corresponding indicator will slow down.
Currently, there is unequivocal evidence in the eurozone that the level of inflationary pressure on the economy of this region is on a trajectory of gradual decline.
The cooling of consumer price growth in the countries of the mentioned region generated the situation under which the European Central Bank had the opportunity to cut its deposit rate twice this year. Also, most officials of this financial institution noted that the process of gradual easing of monetary policy has begun. The relevant statements can be interpreted as an ascertainment that the European Central Bank, within the framework of its consolidated position, considers lowering the cost of borrowing not as a kind of situational decision related to rapid response to circumstances shaping the state of affairs in the space of economic reality, but as a systemic process based on an integrated approach and implying consistent movement within the framework of interest rates cutting.
It is worth noting that an unexpected downturn in the private sector of the eurozone economy also contributed to increased expectations of an acceleration in the pace of interest rate cutting by the European financial regulator.
Currently, signs of a weakening of the country’s economic system are being recorded in Germany. Berlin in September faced an increase in the unemployment rate, which exceeded preliminary expectations for the dynamic of the corresponding indicator. In this case, there is a significant impact of another economic rough patch on the state of affairs in the labor market. It is worth paying attention to the fact that the German economy is one of the largest in the eurozone, which is why its condition is what can be described as a structural component that largely determines the situation in the entire region. In this case, it means the state of affairs in the economic context.
A gauge of economic confidence is on a downward trajectory in the eurozone. The corresponding tendency is largely due to the downturn in the industrial sector and a similar state of affairs in the retail area. Currently, the gauge of economic confidence is at the level that was observed in December. At the same time, consumer confidence in the eurozone is showing growth.
On Friday, markets raised bets that the European Central Bank will decide on another quarter-point reduction in borrowing costs during its monetary policy meeting scheduled for October 17. The probability of implementing the corresponding scenario is currently estimated at 80%.
Goldman Sachs and BNP Paribas also revised their forecasts for the actions of the European Central Bank in the context of changes to the monetary policy strategy in October. Experts from these banks have increased the likelihood that the mentioned financial regulator will make another decision next month on lowering the cost of borrowing. Last week, HSBC also changed its forecast regarding the actions of the European Central Bank in October. Experts of this financial institution have increased expectations regarding the next decision on cutting interest rates in October.
Economist Jamie Rush also predicts lowering borrowing costs by the European Central Bank next month. The expert noted that preliminary expectations in the context of the issue of a potential change in monetary policy provided that policymakers would initially receive confirmation of disinflationary tendencies in the data and then decide on cutting interest rates in December. Jamie Rush stated that the confirmation of the mentioned tendencies seems to be arriving early.
It is worth noting that the European Central Bank has warned that price gains are likely to pick up later in the current year. Also, in the relevant context, this financial regulator has underlined that the retreat back to the inflation target is unlikely to be fully completed before the end of 2025.
European Central Bank officials will receive more data on the economic situation next week. On Monday, September 30, Germany and Italy will publish information about the dynamic of the inflationary process in the current month. Also on Tuesday, October 1, data on the general state of affairs in the eurozone will be released.
It is worth noting that recently the European Central Bank has not taken information on headline inflation indicators as a priority. The corresponding position of this financial regulator is related to the fact that in August, price pressure in the services sector exceeded the 4% mark. Officials of the European Central Bank, who adhere to the so-called hawkish views, pay attention to the mentioned factor as an argument in favor of the fact that the process of lowering the cost of borrowing should rely on an approach based on the principle of prudence.
In France, a moderation in the service sector was also recorded in September. In this space, inflation has decreased from 3% to 2.5%.
Bank of France Governor Francois Villeroy de Galhau said that the European financial regulator should adhere to a gradual approach as part of monetary policy easing. According to him, officials should be as careful not to undershoot as to overshoot the 2% target.
The Bank of France predicts that inflation in this country will slow down earlier than in the eurozone. It is expected that in 2025 the corresponding figure will be 1.5% on average after 2.5% in the current year. The data released on Friday indicate that this forecast is realistic.
