France and Italy make positive progress in combating inflation, fueling expectations for European Central Bank interest rate cuts

According to the latest statistics from the Eurozone, inflation in France has fallen to a four-year low, while prices in Italy unexpectedly remained stable instead of accelerating as the market had anticipated—these inflation data provide a policy basis for the European Central Bank's continued interest rate cuts. Data released on Friday showed that France's consumer prices rose only 0.9% year-on-year in February, significantly slowing from a 1.8% increase in January and below the analysts' general expectation of 1.1%. Italy's inflation rate remained at 1.7%, exceeding the market's general expectation of inflation rising to around 2%.

Both France and Italy have shown a significant slowdown in the price increase of services, which is a key area monitored by the European Central Bank. Following the release of the latest inflation data from France and Italy, the Eurozone interest rate futures market generally expects the European Central Bank to further lower the benchmark interest rate next week. Since 2024, the European Central Bank has continuously cut interest rates multiple times, a policy stance that is in stark contrast to the Federal Reserve, which is expected to possibly choose "no rate cuts" throughout this year.

After the latest inflation data was released, the yield curve of France's 10-year government bonds fell by 3 basis points, indicating that French government bond prices are rising under the stimulus of rate cut expectations. The interest rate futures market has significantly increased bets on the European Central Bank cutting rates by a cumulative 100 basis points this year, marking the first time in nearly three weeks that the market has leaned towards betting on a 100 basis point cut by the ECB, rather than the previously expected 50-75 basis points.

Additionally, inflation in the Eurozone shows regional divergence; for example, Spain's price increase this month reached 2.9%, contrasting sharply with France's low inflation data.

However, European Central Bank officials have recently expressed confidence in achieving the 2% inflation target within the year, especially considering the current weak economic situation in the Eurozone and the significant slowdown in wage growth. A clearer picture of prices will emerge later on Friday after the release of German data, and the overall Eurozone inflation data expected to be released on Monday is projected to moderately decline to a year-on-year increase of only 2.3%.

If major member countries of the Eurozone, as well as the overall Eurozone inflation, significantly cool down, it will pave the way for the European Central Bank to lower the deposit rate from 2.75% to 2.5% next week, bringing the cumulative rate cuts by the European Central Bank since June 2024 to 150 basis points.

Regarding the future policy path of the European Central Bank, there seems to be a divergence among central bank officials. Some officials are concerned about service sector inflation, rising energy prices, and macroeconomic uncertainties brought about by U.S. tariffs. If the cost increases caused by tariffs are significant and difficult to absorb, European companies are more likely to pass on costs to consumers, thereby driving up prices. Another group of officials is more worried about the overly sluggish economy and the recession risks implied by inflation falling short of targets.

The latest market survey by Bloomberg shows that ahead of the European Central Bank's interest rate decision in March, most financial market analysts believe the risk of inflation being revised upward is greater. The latest data on Germany's import prices, which recorded the largest increase in two years, may exacerbate this concern However, the survey released on the same day by the European Central Bank showed that consumers in the eurozone have lowered their inflation expectations for the next 12 months from 2.8% to 2.6%, while the three-year expectation remains stable at 2.4%.

Martin Admer, an analyst at Bloomberg Economics, pointed out that data from various states in Germany, the eurozone's largest economy, indicates that national price pressures will ease slightly. Although this aligns with market consensus, consumers' overall inflation expectation reading of 2.7% for the eurozone remains relatively high and may continue to rise