Inflation in the euro zone fell to 2.8% in January from 2.9% the previous month, providing evidence for the ECB to cut interest rates. However, the core inflation rate was 3.3%, higher than expected. Here's what to expect from the February data release.
Flash inflation figures for the euro area are due to be released at 11am on Friday 1 March, with markets expecting a further decline in the Harmonized Index of Consumer Prices (HICP). Inflation is expected to rise 2.5% from a year ago, down from 2.8% in January, according to FactSet consensus estimates.
What does this mean for the prospects for a spring interest rate cut by the ECB? Ahead of its March 7 monetary policy meeting, members of the European Central Bank recently said that expectations for lower inflation in recent months have been lower than expected in March. It is likely that this will indicate a downward revision of the forecast for 2024.
The eurozone's annual inflation rate fell to 2.8% in January from 2.9% in December, Eurostat said. A year ago, that percentage was 10%.
Services (+1.73 percentage points) contributed the most to the euro area annual inflation rate in January, followed by food, alcohol and tobacco (+1.13 percentage points), non-energy industrial products (+0.53 percentage points), and It became energy. (-0.62 pp).
ECB expected to lower inflation outlook
“We are looking for an updated [ECB] “In March, staff forecast a -0.1 percentage point reduction in core inflation to 2.2% in 2025, but the risk is a significant reduction of -0.2 percentage points to 2.1%,” Goldman Sachs said in a note. “I see it as being biased towards the
Recent ECB commentary has emphasized its dependence on data, as seasonality complicates the interpretation of future inflation numbers. Commissioners called for “continuity, caution and patience” as the process of deflation remains fragile and relaxing too soon could undo some of the progress made in the fight against inflation. said that it is still necessary.
Goldman Sachs said significant progress has been made towards the inflation target and expects a downward revision to the inflation outlook to be made in conjunction with a formal adjustment to policy text in March. “President Lagarde says in a press conference that the outlook is encouraging and the Council remains reliant on data, but further confidence is needed for inflation to return to 2% in a timely and sustained manner. I look forward to it.”
Is April too early for the first rate cut?
But wage data is particularly volatile. The ECB's indicator of negotiated wage rates slowed to 4.5% in the fourth quarter of 2023, but still shows sustained above-target wage growth.
“At 4.5%, the negotiated wage increase remains well above the 3-3.5% range needed to meet the ECB's 2% inflation target,” said Tomasz Wiladek, chief European economist at T. Rowe Price. The ECB Governing Council is certain to wait until at least June before starting a round of rate cuts. By then, negotiated wage data for the first quarter of 2024 will be available.
“However, there is a significant risk of further increases in negotiated wage increases in the first quarter of 2024, which could make even June cuts difficult to achieve under this scenario,” Wierardek said. Concluded.
Goldman Sachs has left its forecast for the first interest rate cut in April unchanged as it expects disinflation to continue. However, economists said: “The timing of the first rate cut remains data-dependent, and if core inflation and wage data slow more than we expect, we see a low hurdle for the Board to wait until June.” added.
