Inflation in France and Spain falls below 2%, fueling hopes of interest rate cuts

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Inflation in two of the euro zone’s three strongest economies hit a three-year low in September, below 2%, raising hopes that European Central Bank (ECB) will continue to cut rates in October.

The EU’s harmonized annual inflation rate in France fell to 1.5% in Septemberthe rate lowest since July 2021 and down from 2.2%, according to the flash estimate from the French Statistical Office (INSEE).

In monthly comparison, prices fell 1.2%, the largest decline since at least 1990.

The EU’s harmonized annual inflation rate in Spain was also weaker than expected in September, at 1.7%, compared to 2.4% in Augustto achieve its lowest level since March 2021according to preliminary data from the Spanish statistical office INE.

Compared to the previous month, Spanish prices fell slightly by 0.1%.

The surprise drop in annual inflation is mainly due to the fall in energy prices in both countries. French food prices remained stable, while Spanish prices fell compared to September 2023.

Core inflation (price increases excluding food and energy prices) in both countries fell to 2.4% in September.

Falling inflation expectations could lead to further ECB interest rate cuts

Falling inflation could allow the European Central Bank to further reduce its benchmark interest rates, after having already made two cuts this year. In September, the ECB lowered the deposit facility rate – the rate by which it guides the stance of monetary policy – by 25 basis points to 3.50%, following a similar decision in June.

The ECB focuses on the 2% inflation target, but decisions are based on core inflation rates, among others.

Better-than-expected data on Friday boosted market bets on a further 0.25% cut on October 17. According to Bloomberg data, investors believe there is a 70% chance of this happening.