FRANKFURT (Reuters) – Inflation in the euro zone unexpectedly fell last month, solidifying the basis for the European Central Bank to start lowering borrowing costs from record highs.
Consumer price inflation in the 20 countries that share the euro currency slowed to 2.4% in March from 2.6% the previous month, with stable growth slowing as food, energy and industrial product prices all pulled down on aggregate prices. The growth rate was slower than expected.
Meanwhile, the underlying inflation rate, which is closely monitored by the ECB to gauge the sustainability of price pressures, fell from 3.1% to 2.9%, lower than the 3.0% expected, according to EU statistics agency Eurostat. data showed Wednesday.
The only potential concern for the ECB is that services inflation has held steady at 4.0% in recent months. This suggests that relatively rapid wage increases are putting prices in this sector under constant pressure.
Inflation has been trending steadily downward for more than a year, but has fallen more rapidly than most expected since last autumn, and debate is turning to how soon and how quickly the ECB will lift its record interest rate hikes. It's moving.
The central bank is expected to acknowledge the improved outlook when it meets next week, but policymakers have repeatedly pointed to June as the next key meeting for policy decisions, making it unlikely to cut rates anytime soon.
As a result, investors see little chance of an April 11 rate cut, but they are fully pricing in a June rate cut, followed by two or three more rate cuts later this year. It will be.
Some private forecasters take a more benign view, with the ECB predicting that inflation will return to its 2% target next year, although they predict headline interest rates will be around 2% by this fall. We are cautious about initiating easing measures as we have only a few predictions.
The ECB said it needed to see key wage data from the start of the year before it felt comfortable easing policy. Some policymakers also worry that cutting interest rates too early could backfire if the Federal Reserve begins cutting rates too soon. This is because lowering interest rates would lead to a weaker euro and higher import inflation.
Wages have grown relatively rapidly in recent quarters, but the pace has slowed and workers are only slowly regaining the real purchasing power lost during years of rapid inflation.
Still, separate data from Eurostat on Wednesday showed the unemployment rate remained at a record low of 6.5%, suggesting the labor market remains unusually tight.
While oil prices have risen steadily since the start of the year, key natural gas prices remain low after an unusually warm winter, and risks from energy costs in the coming months are modest but still manageable. It shows that.
Meanwhile, dovish policymakers argue that current economic growth is unusually weak as the eurozone has avoided recession for the past six quarters.
This weakens firms' pricing power and eases price pressures, giving the ECB more leeway to ease off the brakes, especially since falling commodity prices are also contributing to disinflation.
Although the ECB has not yet decided how far interest rates will fall, there appears to be broad agreement that growth will be constrained until the current 4% deposit rate reaches at least 3%. The initial rate cuts appear to be aimed at easing restrictions rather than providing policy. stimulation.
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Report by Balazs Koranyi. Editing: Toby Chopra
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