Spain's preliminary inflation rate for August rose to about 4.3%, the highest in over three years, exceeding the European Central Bank's (ECB) 2% target by more than double. The driving factors are fuel and shopping basket prices, with energy shocks and partial closures of the Strait of Hormuz pushing up diesel and gasoline prices; core inflation fell to about 2.9%.

The final value for July has been revised up to 3.6%, with harmonized inflation at 3.9%, the highest since February 2023. Since June, the country has had the highest inflation among the four largest economies in the Eurozone. ECB staff have revised Spain's inflation forecast for 2026 up to 3.6%.

In France, July's consumer prices rose 2.1% year-on-year, with harmonized inflation at 2.4%, both higher than in June; energy prices rose 12.6% year-on-year, with oil products up about 20.7% and natural gas 17.7%, while services increased by 2.2%. The preliminary harmonized inflation for August is set to be released on the same day, with market predictions around 2.2%. Eurozone inflation for July was 2.9%, up from 2.8% in June and 2.0% a year ago.

The ECB raised the deposit facility rate by 25 basis points to 2.25% in June, marking the first rate hike in nearly three years; it remained unchanged on July 23, with refinancing at 2.40% and marginal lending at 2.65%. According to Reuters, citing three officials, board members are prepared to raise rates by another 25 basis points to 2.50% at the meeting on September 9-10, to prevent energy prices from rising due to the Iran conflict, but they do not intend to signal further tightening at the meeting.

Paul Hollingsworth, head of developed markets economics at BNP Paribas, believes that a rate hike is almost a foregone conclusion, although the ECB has not made a formal decision. The bank's July research also indicated that a rate hike in September is very likely. The June forecast had already incorporated a rate hike into its assumptions. The market is pricing in one to two subsequent rate hikes. Long-term inflation expectations remain anchored around 2%, with limited second-round effects on wages so far.

Buyers are the money markets buying insurance against energy shocks, while sellers are duration bonds. Funds are flowing from government bonds and interest-sensitive stocks to short-term cash. Beneficiaries are banks with rising net interest margins; those under pressure include highly indebted sovereigns, real estate, and the German 10-year bonds, which are already at a 15-year high. This is a policy repricing driven by energy supply shocks, not a rate hike due to overheating demand.

Source: Public Information