European stock markets closed lower on Friday as investors digested mixed inflation data and concerns about potential tax increases on UK banks. According to CNBC, the pan-European Stoxx 600 fell 0.6% by mid-morning London time, with all sectors trading in negative territory.

French consumer price inflation cooled to 0.8% in August from 0.9% in July, statistics agency Insee reported. The decline came below expectations of another 0.9% reading. Spanish inflation remained steady at 2.7% for August. Among major regional exchanges, the French CAC 40 led losses with a 0.58% decline.

British banking stocks experienced the steepest falls. NatWest dropped 4.4%, Lloyds fell 4.5%, and Barclays declined 3.5%. The losses came after the Institute For Public Policy Research published a report Friday suggesting the government impose a levy on commercial banks following recent profits related to higher interest rates.

Why Banking Tax Proposals Matter

The proposed banking levy reflects growing pressure on Chancellor Rachel Reeves to find new revenue sources for her upcoming autumn budget. IPPR research shows that hiking levies on major firms including Barclays, Lloyds, HSBC and NatWest could raise up to £8 billion annually for public services.

The think tank argues that UK banks have benefited from a "flawed" policy design where Treasury payments to cover Bank of England losses on bond-buying programs have boosted bank profits. With the Bank of England facing record losses estimated at £22 billion yearly as interest rates rose since 2021, taxpayer money is being funneled to bank shareholders while households face cost-of-living pressures.

Investment director Russ Mould of AJ Bell warned that traders were considering whether the "era of bumper profits, dividends and buybacks is now under threat." The timing coincides with rising business confidence, which could be damaged if banks tighten lending criteria in response to new taxes.

European Central Bank Policy Context

The banking sector concerns come as the European Central Bank continues its accommodative monetary policy stance. ECB data shows the central bank has cut its key deposit rate from 4% to 2% over the past year, with officials suggesting their work bringing down inflation is nearly complete.

ECB President Christine Lagarde noted that inflation is currently at the governing council's 2% medium-term target, though trade tensions with the United States continue to create uncertainty. The environment remains "exceptionally uncertain, especially because of trade disputes," the ECB stated in July. This monetary policy backdrop has supported European equities throughout 2025, with the Stoxx 600 gaining approximately 10% year-to-date.

Defense companies provided one bright spot on Friday, with German players Rheinmetall, Hensoldt and Renk all gaining more than 3%. The gains followed comments from German Chancellor Friedrich Merz expressing doubt about potential meetings between Russian and Ukrainian leaders. Despite Friday's decline, the Stoxx 600 remains on track for a 1.4% gain in August, which would be its first back-to-back positive month since early 2025.

Further Reading

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