Inflation in the 20-nation euro zone eased to 2.4% in March, according to flash figures published on Wednesday, which was below expectations. Economists had forecasted the rate to hold steady at 2.6%. The core rate of inflation, excluding certain categories, also decreased from 3.1% to 2.9%. However, inflation in services remained high at 4%, indicating continued pressure from wage growth. The euro area unemployment rate stood at 6.5% in February, stable from January but lower than February 2023.
Price rises in France, Spain, and Germany were lower than expected, with Germany reporting a three-year low of 2.2% in headline inflation. Market expectations now point to the European Central Bank beginning to lower borrowing costs in June. Even ECB hawk Robert Holzmann stated he did not oppose easing in June, a departure from his previous stance that no cuts would take place in 2024. The next ECB monetary policy meeting is scheduled for April 11.
Carsten Brzeski, global head of macro at ING, believes the current narrative indicates a first rate cut in June, citing factors such as March inflation, data on wage growth, and upcoming ECB staff forecasts. Kamil Kovar, senior economist at Moody’s Analytics, suggested the possibility of five rate cuts this year. Despite some unfavorable details such as high services inflation and tumbling food prices, overall inflation is expected to dip below 2% during the summer.
The recent inflation data has boosted expectations for interest rate cuts in the euro zone. The decline in inflation, despite increases in energy inflation and an early Easter boost, suggests that inflation may dip below 2% in the summer. The pressure from wage growth and high services inflation reflects the ongoing challenges faced by the ECB in managing inflation in the region. With various factors at play, such as upcoming ECB meetings and economic forecasts, the decision to lower borrowing costs in June seems increasingly likely.
Overall, the euro zone’s inflation rate eased in March, below expectations, prompting expectations for interest rate cuts to begin in the summer. The European Central Bank is facing pressure to manage inflation as various economic indicators, such as wage growth and services inflation, remain high. Market expectations and recent data suggest that the ECB may begin lowering borrowing costs in June, with factors such as upcoming meetings and economic forecasts influencing this decision.
