Despite a slight recovery in interest rates in December due to energy prices, headline interest rates have remained below 3% for seven consecutive months.
Core inflation, which excludes energy, food, alcohol and tobacco, fell to 2.7% from 2.9% in March. The impact of the year-on-year decline in energy prices continued to ease, at -0.6% compared to -1.8% in March.
The rate of increase in prices for services, which the European Central Bank is keeping an eye on, slowed to 3.7% from 4%.
Meanwhile, gross domestic product (GDP) rose 0.3% in the first three months of the year, slightly above economists' consensus expectations.. GDP for the fourth quarter of 2023 has been revised from zero growth to 0.1% contraction, meaning the eurozone entered a technical recession in the second half of last year.
Market expectations are rising that the ECB will begin lowering interest rates at its next monetary policy meeting on June 6th. Prices in the money market are currently mostly indicating interest rate cuts. According to LSEG data, the probability of a price drop in June is 70%. There is also the possibility of further bets on a rate cut in July or September.
Many voting ECB members told CNBC earlier this month that they expected a rate cut in June, citing the need to prevent the euro zone economy from slowing too much. He also pointed out risks from fluctuations in oil prices and the Middle East.
Gerardo Martinez, European economist at BNP Paribas, said in emailed comments that the fact that services inflation fell for the first time in six months is “a more important development that increases confidence that the ECB will cut policy rates in June. ” he said.
However, Martinez pointed to a slightly lower than expected decline in core inflation and volatility in some services sectors that drove up inflation in France and Italy.
“The road from here is likely to be difficult, and given the growth data that shows the euro area economy is gaining momentum, we believe the path beyond June remains uncertain, and we believe that the ECB “A gradual and cautious (quarterly) pace of easing continues to be expected,” Martinez said.
Jane Foley, Rabobank's head of currency strategy, told CNBC in an email that the growth numbers are encouraging and that stronger-than-expected core inflation “signifies the imperative for more accommodative monetary policy by the ECB.” “It may indicate that the sex is low.” This supported the euro on the back of this announcement, he said.
“Many market participants believe that a June rate cut is close to being agreed upon, but there is still plenty of room for debate about the pace of ECB policy action this year,” Foley added.
