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Euro zone inflation has fallen to its lowest level in nearly two years, boosting hopes that the biggest rise in consumer prices in a generation is quickly fading and paving the way for the European Central Bank to stop raising interest rates.
European government bonds rose and stocks strengthened after better-than-expected inflation data from the euro zone and France.
Eurostat data showed consumer prices in the single currency bloc rose 4.3% in the year to September, down from 5.2% in August. Economists polled by Reuters had expected growth of 4.5%.
The last time inflation was lower was in October 2021.
Core inflation, which excludes energy and food and is closely watched by the European Central Bank as a measure of underlying price pressures, also fell more than expected, to 4.5%, down from 5.3% in August.
Economists said there were clear signs that underlying price pressures were cooling. Frederik Ducrozet of Pictet Wealth Management wrote on social media platform Base effect.”
The sharp slowdown in inflation has increased investors’ hopes that the European Central Bank will end its unprecedented 10 consecutive interest rate hikes at a Governing Council meeting in Athens on October 26.
The central bank raised its benchmark deposit rate to a record high of 4% from a record low of minus 0.5%, raising borrowing costs for households, businesses and governments in an attempt to limit economic activity and ease price pressures.
“This reinforces our view that the ECB is done raising rates,” said Jack Allen-Reynolds, an economist at research group Capital Economics. “Nevertheless, we still We don’t think banks will start cutting interest rates until the end of 2024.”
Eurozone inflation has fallen from a peak of 10.6% last year. Price pressures in the EU are receding more slowly than in the United States, where inflation was 3.7% in August, but faster than in the UK, where inflation was 6.7% last month.
Following Thursday’s turmoil in European bond markets, Italy’s 10-year government bond yield fell 0.17 percentage points to 4.75% on Friday, below its highest level in a decade.
The German 10-year government bond yield fell 0.14 percentage points to 2.83%, having also hit a 10-year high in the previous trading day.
The euro rose 0.2% against the dollar to $1.0576. In the stock market, the Stoxx 600 Index in Europe rose 1.1%, and the German Dax Index rose 1.2%. London’s FTSE 100 rose 0.6% and France’s CAC 40 rose 1.1%.
Price growth slowed in 15 of the 20 euro zone member states, with two of them below the European Central Bank’s 2% target. Prices in the Netherlands fell by 0.3% compared with the same period last year. The highest inflation rate in the Eurozone is in Slovakia, reaching 8.9%.
Germany removed cheap public transport tickets and fuel prices from annual comparisons last year, lowering inflation, while France recently cut electricity subsidies and raised energy prices.
The euro zone economy is widely expected to shrink in the third quarter, with separate data on Friday adding to concerns after German retail sales fell for a third straight month in August (down 1.2% from July). French household spending fell by 0.5% during the same period.
Despite the recent rise in oil prices, euro zone energy costs fell 4.7% in the year to September, falling faster than the previous month. Food, alcohol and tobacco inflation also fell to 8.8%, and goods inflation fell to 4.2%. Services sector inflation slowed to 4.7%, dragged down by a sharp drop in monthly air ticket prices.