Belgium's Cooling Inflation Opens Doors for Bond Investors: Why Now is the Time to Consider Belgian Debt

The decline in Belgium's inflation rate, driven by plummeting energy prices and easing core inflation pressures, is reshaping the investment landscape for fixed-income assets. For bond investors, this environment presents a compelling opportunity to capitalize on Belgian government debt, which could offer both safety and yield as European Central Bank (ECB) policy normalization slows. Below, we analyze the data and trends supporting this thesis.

Recent Inflation Trends in Belgium

Belgium's annual inflation rate fell to 2.8% in May 2025, marking a significant retreat from its December 2024 peak of 4.4%. This decline outpaces the Eurozone average of 1.9% for the same period, though the gap between Belgium and its peers has narrowed. The drop is particularly pronounced in energy prices, which have been a key driver of inflation moderation.

Energy Prices: The Catalyst for Cooling Inflation

The energy sector's contribution to Belgium's inflation has shifted dramatically. In April 2025, energy inflation fell to 0.95% annually, down sharply from 5.48% in March and 8.17% in February. This decline was fueled by plummeting natural gas (-5.9% month-on-month) and electricity (-4.6% month-on-month) prices. While energy's direct contribution to May's inflation rate is not explicitly stated, its downward trajectory is clear.

In contrast, the Eurozone's energy prices dragged annual inflation by -0.34 percentage points (pp) in May 2025, signaling broader deflationary pressures. Belgium's April data showed energy still contributing +0.09 pp to inflation, suggesting its energy markets may have stabilized slightly slower than the region. However, with global energy prices trending lower—driven by oversupply in natural gas and softening demand—Belgium's energy inflation is likely to follow the Eurozone's downward path in coming months.

Core Inflation: A Gradual Retreat

While energy prices dominate the narrative, core inflation (excluding energy and unprocessed food) remains a key metric. Belgium's core rate stood at 2.1% in May 2025, down from 2.7% in March but still above the ECB's 2% target. The services sector, particularly housing costs, continues to exert upward pressure, contributing +0.95 pp to April's inflation. However, the National Bank of Belgium projects core inflation to ease further, with the smoothed health index—a key metric for public sector wage adjustments—falling to 132.79 in April, its lowest since 2021.

ECB Policy Outlook: Less Hawkish, More Dovish

The ECB's recent stance has been “data-dependent,” with policymakers signaling a pause in rate hikes until inflation consistently aligns with the 2% target. With energy prices deflating and core inflation moderating, the ECB is unlikely to raise rates in the near term.

Belgium's inflation trajectory supports this outlook. Even though its headline rate remains above the Eurozone average, the narrowing gap and declining trend suggest less urgency for further tightening. This stability in policy expectations is bond-friendly, as reduced rate hike risks typically boost bond prices.

Investment Case for Belgian Government Bonds

The combination of easing inflation and a dovish ECB creates a favorable backdrop for Belgian government bonds. Key points for investors:
1. Lower Rate Hike Risk: With inflation cooling, the ECB's terminal rate is likely capped at 3.75% (current level), reducing the threat of further upward pressure on bond yields.
2. Yield Advantage: Belgian 10-year government bonds currently offer a yield of 3.1%, higher than the Eurozone average of 2.8%, providing a premium for investors seeking safety.
3. Duration Stability: Core inflation's gradual decline reduces the likelihood of sudden policy shifts, making long-dated bonds (e.g., 10-year maturities) less volatile.

Risks and Considerations

• Energy Volatility: Geopolitical risks (e.g., Russia-Ukraine conflict) could reignite energy price spikes.
• Core Inflation Persistence: Services-driven inflation may prove stickier than expected, keeping core rates above target.
• Eurozone Divergence: Belgium's higher inflation than the Eurozone could lead to widening yield spreads if ECB policy diverges.

Conclusion: Seize the Opportunity

Belgium's declining inflation, particularly in energy, and the ECB's dovish pivot make its government bonds an attractive fixed-income play. Investors should consider adding long-dated Belgian government bonds to portfolios for yield and capital preservation. While risks remain, the data suggests that the tailwinds for bonds—stable rates, narrowing inflation gaps, and decent yields—are stronger than the headwinds.

For now, the message is clear: Belgium's debt offers a safe harbor in an uncertain macroeconomic environment.