of Latest data Eurozone inflation slowed in March, with the headline forecast at 2.4% year-on-year, below the consensus forecast of 2.6%. Core inflation was also lower than expected, coming in at 2.9% year-on-year, compared to the consensus estimate of 3.1%.
The main reason for the decline was a decline in core goods inflation, while services inflation, which is a focus of the European Central Bank (ECB), remained at 4.0% year-on-year for the fifth consecutive month. However, there is an “Easter effect” and this services inflation should persist in March and partially reverse in April.
Aiming for more moderate service inflation
In recent comments and speeches, ECB President Christine Lagarde has emphasized the importance of seeing services inflation as clearly moderate. It was therefore no surprise that the ECB left interest rates unchanged on April 11th. At the same time, she indicated that she was considering a rate cut at the June meeting.
The ECB said it would keep its benchmark deposit rate at 4% until the Governing Council is satisfied that price pressures have stabilized.
Before the June meeting, policymakers will receive inflation data for April and May, first-quarter negotiated wage data, and a number of other indicators of activity. We do not expect these data to pose any impediment to a rate cut in June.
US inflation rises again
However, the future trajectory of the ECB's policy interest rate has become somewhat uncertain after data showed that US consumer prices rose 3.5% compared to March a year ago. This was larger than the expected 3.4% increase. Core U.S. inflation also exceeded expectations due to price pressure in service sectors such as health care and auto insurance.
Markets reacted to the U.S. inflation data by lowering the probability that the Federal Reserve would cut interest rates in the near term, with the chance of a rate cut by September now standing at 50%.
Market expectations for how many interest rate cuts the ECB will make this year have also been reduced in response to developments in the United States. Some euro area policymakers may want to avoid lowering interest rates much more aggressively than the US Federal Reserve due to concerns about a weaker euro and the resulting increase in (imported) inflation. unknown.
However, Lagarde stressed at a recent press conference that the ECB is not “dependent on the Fed.”
In our view, a rate cut in June seems likely, but the ECB's subsequent monetary policy will depend largely on subsequent economic data.
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