Inflation Cools Quickly in France, Spain as ECB Mulls Rate-Cut Path — 3rd Update

By Joshua Kirby and Ed Frankl

Inflation cooled more rapidly than expected in France and Spain during September, likely giving the European Central Bank more confidence that it can cut its key interest rate without risking a revival of price pressures.

The sharper-than-expected fall in inflation comes amid signs that the eurozone economy is slowing more rapidly than policy makers had anticipated as high borrowing costs continue to restrain demand.

For a growing number of economists who follow the ECB, that combination is likely to persuade policy makers to follow the Federal Reserve and the central banks of Sweden and Switzerland in paying more attention to the risks of a recession, and less to the possibility of a long period of high inflation.

"Recent data point to an increased risk of a more pronounced deterioration in economic activity, while the near-term inflation outlook appears benign," economists at BNP Paribas wrote in a note to clients.

Figures released Friday showed consumer prices in France were 1.5% higher than a year earlier, down from an inflation rate of 2.2% in August, which was well below economists' forecasts from a consensus compiled by The Wall Street Journal.

Across the Pyrenees in Spain, inflation similarly dropped more than expected, hitting 1.7% from 2.4% a month earlier.

The euro fell against the dollar following the data releases, an indication that traders and investors expected the ECB to lower its key interest rate more rapidly than previously. Many now expect the bank to cut borrowing costs for a third time in October, having previously anticipated that the next move would come in December.

In both countries, inflation looks to be leveling out at a lower level, independently of monthly bumps in the road caused by volatility in energy prices.

In France, services prices--a key focus this year for rate setters concerned about a potential resurgence in inflation--rose 2.5%, down from 3.0% a month earlier. Demand for services over the summer, when Paris hosted the Olympic Games, looks to have eased considerably, bringing prices down with it. Lower core inflation in Spain also points to a softening in services prices as the peak tourist season ended.

Easing inflation comes amid sluggishness in the French economy, which grew just 0.2% over the second quarter. While it will likely get a transitory bump from the Paris Games, economists don't expect output to pick up much momentum over the subsequent quarters. Business surveys set out this week suggested activity in France's private sector weakened as the third quarter drew to a close, with continued sluggishness in manufacturing and a fading boost from the services sector a month after the Olympics ended.

With the wider 20-member eurozone seeing a similarly downbeat outlook for growth, pressure might mount on the ECB to act more quickly to lower interest rates and ease some of the weight placed on activity in the currency union.

Fresh sentiment data from the European Commission also published Friday showed business confidence ebbed this month, dragged down by an industrial sector that shows little sign of recovery from its current weakness.

While the central bank has cut rates twice this year, the bank has maintained a cautious tone around the potential for inflation to rear its head once more.

But if inflation in the eurozone's other major economies--such as Germany and Italy--books a similar trajectory to that of France and Spain this month, rate setters might be encouraged to continue to cut more boldly. Inflation data for the euro area as a whole is due to be published on Tuesday.

The Fed reduced its own benchmark rate by a half-point this month in a bid to stave off concerns about a slowdown in the U.S. economy, while other European central banks, including the Swiss National Bank, have moved more quickly than the ECB to lower borrowing costs this year.

Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby and to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

September 27, 2024 06:27 ET (10:27 GMT)

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