Inflation Drop in France and Spain Spurs Hopes for More ECB Cuts

Inflation in France and Spain dropped below 2% in September, the lowest in three years, raising expectations for additional rate cuts by the European Central Bank (ECB). In France, the EU-harmonised inflation rate fell to 1.5%, down from 2.2% in August, marking the lowest level since July 2021. On a monthly basis, French prices decreased by 1.2%, the largest decline since 1990, according to INSEE, the French statistics office.

Similarly, Spain saw its inflation drop to 1.7% from 2.4% the previous month, reaching its lowest level since March 2021, according to preliminary data from the Spanish statistics office, INE. Spanish prices also edged down by 0.1% month-on-month. Falling energy costs in both countries largely drove the reduction in inflation. While French food prices remained stable, Spain saw a decline in food prices compared to September 2023.

Core inflation, which excludes volatile food and energy prices, also fell to 2.4% in both nations, further encouraging expectations for monetary easing. 

With inflation easing, the ECB has more room to cut its benchmark interest rates. Following two rate cuts earlier this year, the ECB reduced its deposit facility rate by 25 basis points to 3.50% in September, continuing its efforts to reach the 2% inflation target.

Investors are now pricing in a 70% probability of another 0.25% rate cut by the ECB in its meeting scheduled for 17 October, based on market data. This potential cut follows the ECB’s continued focus on core inflation and the overall economic health of the eurozone.