Euro zone inflation steadies in April, adding to ECB rate cut case

Inflation in the eurozone remained unchanged at 2.4% in April, aligning with expectation, however, core inflation, which excludes volatile components like food, energy, alcohol, and tobacco, slowed to 2.7% from 2.9% in March, slightly exceeding forecasts at 2.6%.
This slowdown in core inflation, a key indicator for policymakers, strengthens the case for the European Central Bank to cut interest rates in June.

The ECB has nearly committed to a rate cut on June 6, provided there are no significant surprises in wage or price developments. The recent data aligns with the trajectory the ECB envisioned in its March projections.

Although closely watched services inflation eased to 3.7% from 4% due in part to the timing of Easter, policymakers remain concerned about rapid wage growth, which is a significant factor in services costs.

Inflation has declined faster over the past year than the ECB anticipated, prompting discussions about potential rate cuts for months.
However, policymakers are still awaiting more reassuring data, particularly on wages.

The ECB had raised interest rates at a rapid pace in 2022 and 2023 to combat inflation but has maintained the deposit rate at 4% since September, arguing that it has implemented sufficient measures to restrain demand and mitigate price pressures.

Some policymakers are now retracting earlier statements about a series of rate cuts following the anticipated June cut, as inflation appears to be on track to reach the 2% target by 2025. Heightened caution stems from increased energy costs and geopolitical tensions, which could disrupt shipping and raise commodity prices, posing risks to the eurozone’s trade-dependent economy.

Unexpectedly high inflation in the United States may delay rate cuts by the Federal Reserve, which could impact global financing conditions. Although the ECB asserts its independence, the Fed’s actions influence global financial dynamics. A widening interest rate spread could weaken the euro and raise imported inflation, counteracting the ECB’s efforts to lower borrowing costs.

Policymakers maintain that staying ahead of the Fed is not an issue, but prolonged postponement of Fed easing, or increased US inflation exported to the eurozone could pose challenges.