Eurozone Faces Third Consecutive Month of Falling Inflation, Fueling Expectations of ECB Rate Cut

The eurozone encountered an unexpected decline in its annual inflation rate for the third straight month in March, heightening speculation of a potential key interest rate cut by the European Central Bank (ECB) in June. The European Union's statistics agency released data showing that consumer prices rose by 2.4% compared to the previous year, marking a decrease from February's inflation rate. Economists, previously polled by The Wall Street Journal, had anticipated inflation to remain stable.

Moreover, core inflation, which excludes volatile energy and food prices, also fell short of economists' expectations, reaching its lowest level in over two years. However, Eurostat noted that prices of services remained elevated, with no change observed from the previous four months.

The persistent decline in inflation underscores the likelihood of policymakers gaining confidence in achieving the bank's inflation targets, potentially paving the way for a reduction in borrowing costs in the coming months. While ECB policymakers are slated to convene soon, they have signaled a preference for waiting to assess additional data on wages and new forecasts from economists before making any adjustments to policy. ECB President Christine Lagarde suggested in a March speech that if forthcoming data align with expectations, a rate cut in June could be imminent.

Bert Colijn, a senior economist at Dutch bank ING, remarked on the favorable implications of cooling inflation for rate cuts but anticipated the ECB to exercise caution and wait until June before taking action.

In contrast, the United States has witnessed a divergent trajectory, with the Federal Reserve reporting an uptick in inflation in February. Fed Chair Jerome Powell emphasized a cautious approach, emphasizing that there is no urgency to implement rate cuts given the robust economic activity.

Presently, money markets are projecting a rate cut by the ECB in June, with a potential, albeit lesser, chance of a Fed cut in the same month. Nevertheless, concerns persist in the eurozone economy, with output stagnating since Russia's invasion of Ukraine led to soaring energy and food prices. Additionally, a survey of purchasing managers at eurozone factories revealed a continued decline in activity.

While some ECB policymakers advocate for swift rate cuts following the June decision, concerns remain about the eurozone's strong job market potentially fueling higher wages and prolonged inflation. Soren Radde, head of European economic research at Point72, opined that softer price rises in the eurozone may alleviate concerns about earlier momentum, but the bank is likely to wait for further inflation data to assess underlying momentum and adjust forecasts accordingly.

By fLEXI tEAM