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Inflation rebounded in France and Spain in February, sending European governments’ borrowing costs up as doubts increased over how quickly the European Central Bank will stop raising interest rates.

French consumer prices rose 7.2 per cent in the year to February, driven to the highest rate since the euro was launched in 1999 by faster increases in food and services prices. Economists polled by Reuters had expected French inflation to stagnate at January’s 7 per cent level.

Spanish consumer price growth in February accelerated to 6.1 per cent, up from 5.9 per cent in January and above economists’ expectations for a fall to 5.5 per cent, despite the government cutting food taxes in January.

European government bond prices fell in response on Tuesday, sending the yield on Germany’s rate-sensitive two-year bond up 0.08 percentage points to 3.15 per cent, its highest level since the 2008 financial crisis.

The figures suggest eurozone inflation may prove more persistent than hoped, ahead of the publication of February price growth data for the bloc on Thursday, which economists expect to show a slowdown to 8.1 per cent, from 8.6 per cent in January.

“There are clear upside risks for euro inflation in February,” said Jörg Krämer, chief economist at German lender Commerzbank.

Sharp drops in wholesale energy prices after a mild winter and reduced fuel consumption have helped eurozone inflation to fall rapidly from its October record of 10.6 per cent. However, it is unclear how quickly price growth will slow to the ECB’s 2 per cent target.

The ECB has committed to a further half percentage point increase in its deposit rate at its meeting on March 16. That would take the benchmark rate to 3 per cent, up from minus 0.5 per cent last July, and swap markets are pricing in further increases to just below 4 per cent by the end of the year.

ECB chief economist Philip Lane said on Tuesday there was still a strong case for another half percentage point rate rise in March even though “there’s significant evidence that monetary policy is kicking in” and forward-looking indicators show price pressures cooling.

“We’re all signed up to the criterion that sufficient progress in underlying inflation is important,” Lane told Reuters, suggesting the ECB will need to see slowing price growth in goods and services as well as energy and food before it stops raising rates. Even then, he said it would be “quite a long-lasting period, a fair number of quarters” before it cut rates.

French inflation was mainly driven up by faster growth in food and services prices, while energy inflation fell despite a 15 per cent rise in the regulated electricity tariff this year. The country’s core inflation rate, which includes processed foods, rose from 5.6 per cent to 5.8 per cent. The month-on-month growth in French consumer prices accelerated to 0.9 per cent, up from 0.4 per cent in January.

Melanie Debono, an economist at research group Pantheon Macroeconomics, said higher Spanish inflation was “surprising” after Madrid introduced a €10bn package of temporary tax cuts on staples, including bread, pasta, dairy products, fruit and vegetables.

Luis Planas, Spain’s agriculture minister, said he saw signs that food prices would start falling before too long. “We are looking at all the costs that influence food production and we’re seeing that those costs are progressively going down.”

The government has urged participants ranging from farmers to supermarkets to act “responsibly” by passing savings on to consumers.

A measure of underlying Spanish inflation, which excludes energy and fresh food, rose 0.7 per cent month on month and hit a record high of 7.7 per cent in the year to February.

“The chance that the eurozone figures come in even higher than our above-consensus forecast on Thursday and, in turn, of a 50 basis-point ECB rate hike in May, is rising,” Debono added.

Additional reporting by Barney Jopson in Madrid

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