Inflation in EU continues to ease, adding to bets for ECB’s June rate cut plan

Eurozone inflation slowed further in March, aligning with expectations and reinforcing anticipation for a potential interest rate cut by the European Central Bank in June.

Inflation in the euro bloc decelerated to 2.4% in March from 2.6% in February, consistent with forecasts.

Meanwhile, core inflation, excluding volatile food and energy prices, also dipped to 2.9% from 3.1%, meeting expectations.

Despite the overall slowdown, services inflation remained persistently high at 4.0%, which adds to concerns about underlying price pressures.

Eurozone inflation has been declining swiftly over the past year, setting the stage for potential interest rate cuts starting in June.
However, the road ahead may see volatile price growth data before a gradual return to the ECB’s 2% target.

The eurozone faces contrasting inflationary influences. On one hand, factors such as sluggish wage growth, weak demand amid near-recessionary conditions, fiscal tightening, inexpensive imports from China, and relatively low gas prices post a downward pressure on inflation. Conversely, rising oil prices and a depreciating euro exert upward pressure, while stubborn services costs elevate the risk of sustained inflation above target levels.

Despite the mixed forces at play, policymakers have indicated that recent oil price fluctuations and currency movements are insufficient to fundamentally alter the inflation outlook.
However, market expectations for ECB rate cuts have softened, with investors now anticipating only two moves, totaling 75 basis points, after June.

The retreat in market expectations for rate cuts contrasts with sentiments from just two months ago, when forecasts suggested between 4 and 5 cuts. This shift indicates a recalibration of expectations regarding the timing and extent of ECB monetary policy adjustments.

In summary, while eurozone inflation continues to moderate, concerns persist regarding persistent services inflation and the potential impact of opposing inflationary forces. Market sentiment regarding ECB rate cuts has evolved, reflecting ongoing uncertainties surrounding the inflation outlook and economic conditions in the euro area.