Expected pick-up in eurozone inflation raises doubts over rate cuts

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Inflation is expected to have jumped back up across much of Europe, casting doubt over investors’ hopes that the European Central Bank will start cutting interest rates as early as March.

French figures released on Thursday morning showed inflation rising in line with economists’ expectations to 4.1 per cent in the year to December, up from 3.9 per cent in November after a phase out of energy subsidies.

Inflation is likely to rise more sharply in Germany, where data due to be released on Thursday afternoon is expected to show a jump in annual consumer price growth to 3.8 per cent in December, up from 2.3 per cent a month earlier, according to economists polled by Reuters.

Consumer price growth in the eurozone has been slowing for six months, bringing it close to the ECB’s 2 per cent target. Bond and equity markets rallied in the final weeks of 2023 as investors bet borrowing costs would start to fall in the spring.

However, the reduction of government subsidies on gas, electricity and food that began last year is expected to trigger a re-acceleration of annual inflation in much of Europe.

The pick-up in inflationary pressure reflects a comparison with a year earlier when Berlin paid the gas bills of most households and Paris heavily subsidised electricity costs — driving down the cost of utility bills temporarily. 

Prices also look set to be pushed up after the German government was forced to scrap several other subsidies and increase taxes to help fill a €60bn hole in its budget plans left by a constitutional court ruling against its use of off-balance sheet funds.

“The expected increase in German inflation in December, but also the prospects of a further re-acceleration of German inflation as a result of the fiscal woes should be enough to push back markets’ rate cut expectations,” said Carsten Brzeski, global head of macro at…