(Bloomberg) — Inflation in the euro zone slowed more than expected in February, helping European Central Bank officials unwilling to rush to cut interest rates.
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Eurostat said on Friday that consumer prices rose 2.6% in February compared to a year earlier. This is higher than the median estimate of 2.5% in a Bloomberg survey of economists. Core inflation, which excludes volatile factors such as food and energy, was also slower than expected, at 3.1%.
A deceleration was seen across the currency bloc as rising energy costs faded and the economies of 20 countries stagnated. This week, Germany, France and Spain announced lower inflation rates, while Italy on Friday said its inflation rate was unchanged at 0.9%.
German government bonds maintained their early decline and the euro was flat at around $1.08. The market's outlook on the pace and size of rate cuts this year remains largely unchanged. The first reductions are expected by June, but the probability of them being implemented by then has fallen to about 80%, with this week becoming almost certain.
The data comes just days before the ECB sets its next borrowing costs, with economists expecting deposit rates to remain at 4% at the fourth Governing Council meeting. Officials are on track to make the first cuts in June, but a minority supports faster action.
Some politicians also want cuts to come more quickly as the economy struggles. Portugal's Finance Minister Fernando Medina was the most recent to speak out, telling Bloomberg there were “high risks” in continuing to tighten policy.
“We are seeing a very strong economic slowdown in various European countries,” he said in Sao Paulo on Thursday. “Stagnation and recession have already begun in some places. At this point, the risk of leaving the situation as it is is greater than starting the process of lowering interest rates. The economy has already slowed down enough.”
Meanwhile, policymakers remain optimistic that inflation is on track to reach the 2% target. They remain concerned that rising wages and labor costs risk prolonging price pressures.
Indeed, despite the economic downturn, the job market remains tight, with the unemployment rate hitting a record low of 6.4% in January, according to another Eurostat announcement.
Austrian central bank president Robert Holzmann said: “I have looked at the inflation data coming in from Europe and at the national level, and the results are my view that we have to wait, we have to be careful, and we cannot make decisions in haste.'' This confirmed his opinion.” he spoke in Vienna on Friday.
President Christine Lagarde said on Monday that “the current disinflationary process is expected to continue,” but that she and her colleagues needed to see further evidence of a sustainable return to target.
Analysts are also concerned that this week's numbers mask a month-on-month rise in inflation, which is not distorted by changes in energy costs, which distort the annual comparison.
What does Bloomberg Economics say…
“Disinflation continued in the euro area in February. Importantly for the ECB, a modest portion of the decline was driven by inflation in services prices, which is part of the basket over which policymakers have the most influence. “Further declines are expected in the coming months, and the Board needs to assess that before cutting rates.”
—Jamie Rush and Maeva Cousin, economists. Click here for the full text of REACT
Some officials have said inflation could fall to 2% or even lower already this year, months earlier than assumed in the ECB's latest forecasts from December. . The staff is expected to release new forecasts next week, with some downward revisions expected for short-term price increases and economic expansion.
“The latest set of data suggests that it will reach 2% in the fall,” Greece's central bank governor Giannis Stournaras said last week. After achieving the target, his opposite number in Portugal, Mario Centeno, predicts that inflation “will hover around 2%. This is what we want.”
But the dovish Stournaras agrees with his more hawkish colleagues on the board in stressing that there will not be enough information, especially on salaries, to decide on a rate cut by June.
Indicators such as negotiated wages are starting to point in the right direction, but new, more positive ECB indicators showed that the tipping point has not yet been reached.
Some analysts believe inflation will pick up again in the medium term. Holger Schmieding, chief economist at Berenberg Bank, expects price pressures to gradually recover towards 2.5% throughout 2025.
Bloomberg Economics' March nowcast expects it to be 2.2%, taking into account the latest data.
–With contributions from Alexander Weber, Alice Gledhill, Marton Eder, Constantine Courcoulas, Barbara Sladkowska, Joel Rinneby, and Andrej Sokol (economists).
(Market reaction, ECB's Holtzmann nowcast updated from 4th paragraph.)
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