French inflation has unexpectedly held steady at the start of 2025, raising possibilities for interest rate cuts from the European Central Bank (ECB). According to France's statistics agency INSEE, consumer prices rose 1.8% year-on-year in January, matching December's figure and falling short of analysts' predictions for a 1.9% increase. Meanwhile, regional inflation data from Germany showed significant slowdown, with two of its largest states recording inflation rates of 2% and 2.5%, leading traders to speculate more aggressively on potential ECB easing.
The ECB had recently lowered its deposit rate by 25 basis points, continuing its trend of rate cuts for the fourth consecutive meeting, bringing it down to 2.75%. Despite these adjustments, ECB President Christine Lagarde indicated the central bank remains cautious, asserting the continent's disinflationary process is 'well on track' amid persistent pressures, particularly within the services industry. The current environment is markedly different from the double-digit inflation rates seen during 2022, leading the ECB to reconsider its classification of policy stances as 'restrictive' during their next meeting slated for March.
Consequently, the steady inflation reported from France has prompted traders to bolster their expectations for cutting rates, with money markets now pricing approximately 83 basis points of rate cuts for 2025, up from 70 basis points earlier. This development elicited mixed reactions, with the euro slipping 0.2% to $1.037, and two-year German yields decreased by nine basis points to 2.12%.
On the consumer front, the monthly ECB survey highlighted persistent caution among consumers. Projected inflation expectations for the following year edged up to 2.8%, the third consecutive month of increase, though long-term forecasts for inflation remained stable at around 2%. A separate survey indicated professionals expect wage growth to ease, which is projected to help maintain inflation levels within check.
Madis Muller, a member of the ECB Governing Council, noted, 'The momentum of price increases in the euro area is fading.' He expressed optimism, stating it is 'entirely realistic' to expect price increases will be very close to the ECB’s target of 2% by mid-2025.
France's inflation statistics were influenced primarily by modest increases in energy and manufactured goods, but the services sector saw its inflation gauge slow to a mere 1.9%, marking the lowest reading observed in over three years. Experts predict this trend may reverse slightly, with suggested fluctuations attributed to expected declines in energy prices but adversities from service price base effects likely influencing inflation over the coming months.
French authorities are grappling with the repercussions of economic contraction experienced at the end of 2024, which has exacerbated budget deficit challenges. Prime Minister François Bayrou has been tasked with addressing this deficit and recently presented a financing bill to the National Assembly, where he faces a no-confidence vote next week. With the current economic backdrop still displaying fragility, these inflation figures offer the government some respite amid fiscal distress.
Overall, the stable inflation scene is cautiously promising as it aligns with efforts to mitigate economic strain but underscored by risks linked to the broader economic climate across Europe. Further inflation data will be forthcoming, with Germany expected to release figures later today, spotlighting the contrasting economic dynamics across the eurozone.