Eurozone inflation falls below forecasts in March, adds to ECB rate cut expectations

The Eurozone experienced an unexpected decline in inflation last month, adding weight to the case for the European Central Bank (ECB) to consider lowering borrowing costs from their current record highs.

Bloc’s consumer price growth slowed to 2.4% in March, down from 2.6% in the previous month, which surpassed consensus expectations for a 2.5% increase.

Core inflation, which excludes volatile components and is closely monitored by the ECB, also fell to 2.9% from 3.1% in February, below the anticipated 3.0%.

Despite the overall decline in inflation, services inflation has remained constant at 4.0% for several months. This suggests that robust wage growth in the sector is exerting continuous upward pressure on prices.

Eurozone inflation has been on a consistent downward trajectory for over a year, accelerating since last autumn beyond many initial predictions.
This shift in the inflation landscape has prompted discussions on the timing and pace of potential rate cuts by the ECB.

While the ECB is expected to acknowledge the improved economic outlook in its upcoming policy meeting, policymakers are unlikely to implement rate cuts immediately. Instead, they have indicated that June will be a crucial meeting for policy decisions.

Investors have already priced in a rate cut for June and anticipate further cuts later in the year. However, the ECB remains cautious, aiming for inflation to reach its 2% target by next year.

Despite relatively rapid wage growth in recent quarters, the pace is slowing, and workers are gradually recovering purchasing power lost during periods of rapid inflation.
However, unemployment remains at a record low of 6.5%, indicating a tight labor market.

While oil prices have been rising steadily, natural gas prices remain low, partly due to a mild winter. This situation presents mild risks related to energy costs, although they are deemed manageable.

Some policymakers argue that economic growth in the Eurozone is exceptionally weak, as the region has skirted a recession for six consecutive quarters. This dovish stance suggests a willingness to consider more accommodative monetary policies to support economic activity.

In summary, the recent inflation figures and economic indicators underscore the challenges facing the Eurozone economy, prompting discussions within the ECB about potential policy adjustments to support growth and manage inflationary pressures.