Eurozone inflation slowed across the board in March, according to final Eurostat data on Wednesday, with the European Central Bank (ECB) cutting interest rates in June even as rising energy costs and a weaker euro cloud the outlook. Expectations for this increased. .
Inflation in the 20 countries that share the euro currency has slowed to 2.4% from 2.6% in February, in line with preliminary forecasts released earlier this month, the European Union's statistics office said. did.
Meanwhile, underlying inflation, which excludes volatile food and energy prices, fell from 3.1% to 2.9%, even as services inflation stabilized at an uncomfortably high level of 4.0%.
Inflation has fallen rapidly over the past year, paving the way for a rate cut from June, even though the coming months will likely see volatile price growth data and a prolonged return to the 2% target. .
The eurozone faces opposing forces of inflation, which could cause headline interest rates to hover around current levels in the coming months before falling towards 2% in the autumn.
Factors pushing down on inflation include a continued slowdown in wage growth, weak demand in a near-recession environment, tighter fiscal policy, cheaper imports from China, and relatively low gas prices after a warm winter. Examples include.
However, rising oil prices and a weaker euro will both put upward pressure on prices, while stubborn service costs will increase the risk that the underlying inflation rate will not exceed the target.
TS Lombard said in a note: “Recent increases in commodity and energy prices are likely to further fuel the headline (inflation) in the coming months. The weakening of the euro/dollar due to policy differences between the Bundesbank and the ECB is likely to drive this development. It will only make things worse.”
“The euro area remains the world's largest energy importer and is highly sensitive to energy prices.”
The euro has fallen about 4% against the dollar since the start of the year, a move exacerbated by expectations that the U.S. Federal Reserve will slow the pace of interest rate cuts amid weak inflation.
However, economists say this is primarily due to movements in the dollar rather than the euro, and the trade-weighted decline in the euro is much smaller, limiting the impact of exchange rate fluctuations.
“For the time being, a weaker euro does not seem to be the ECB's biggest concern,” ING said in a note. “Rather, it is the soaring oil prices and the possibility of further escalation of the Middle East conflict that will cause headaches, at least for ECB hawks.”
“Not dependent on the Fed”
Policymakers have long said that changes in oil prices and exchange rates are too small to fundamentally change the outlook for inflation, but market expectations for ECB rate cuts continue to subside.
Investors now expect interest rates to be cut by just 75 basis points this year (two since June), a step back from two months ago, when rates were cut four or five times.
ECB President Christine Lagarde said on Tuesday that she would cut interest rates soon unless there is a big surprise, insisting that geopolitical events have not had a significant impact on commodity prices so far.
The same day, senior U.S. central bank officials, including Federal Reserve Chairman Jerome Powell, backed away from providing guidance on when to cut interest rates, saying monetary policy needs to remain restrictive for a longer period of time.
Official figures last week showed U.S. consumer prices picking up again, rising 3.5% in March from a year earlier, dampening hopes for a rapid interest rate cut.
“We are not dependent on the Fed,” Lagarde suggested, adding that monetary authorities could lower interest rates ahead of a similar action by the U.S. central bank.
But he also warned that the path to achieving 2% inflation would be “tough.”
Energy has been a major drag on inflation throughout the year, with high year-on-year numbers being lower than underlying numbers, but this trend could reverse in the second half of the year if oil prices continue to rise.
However, some argue that because the traditional link between oil and gas prices is broken, higher oil prices will not automatically push up natural gas prices and will not have as much of an upward effect on inflation as in the past. There is.
