Eurozone inflation overshot analysts’ expectations on Wednesday (3 April), with headline prices falling back to their lowest level in three years and core inflation numbers dropping to their lowest in two years in March — boosting hopes of rate cuts ahead of the European Central Bank’s (ECB) meeting next week.
In a flash estimate published on Wednesday (3 April), the EU’s official statistics office Eurostat reported that headline inflation dropped from 2.6% in February to 2.4% in March: the lowest recorded rate since July 2021, except for the November 2023 figure, which also came in at 2.4%.
Economists polled by Reuters last week had expected inflation to remain unchanged at 2.6%.
Core inflation, which provides a better estimate of underlying price pressures by stripping out volatile food and energy prices, fell 0.2 percentage points to 2.9%: the eighth consecutive monthly decline and the lowest registered core rate since February 2022.
The data comes as the bloc’s four largest economies — Germany, France, Italy, and Spain — recorded lower-than-expected March inflation rates over the past week.
Carsten Brzeski, chief eurozone economist at ING, suggested the data could be interpreted as “a very late victory for Team Transitory” — a reference to economists who view high eurozone inflation as a temporary, rather than permanent, phenomenon.
“I think it’s nicely playing out for the ECB,” Brzeski told Euractiv. “It looks a little bit as if inflation is really fading away.”
The ECB hiked rates on ten consecutive occasions between July 2022 and September 2023 after prices soared following Russia’s full-scale invasion of Ukraine, bringing its key interest rate from negative 0.5% to a record high of 4%.
The central bank held interest rates at 4% at its previous four meetings, as inflation edged closer to the ECB’s 2% target rate after peaking at 10.6% in October 2022.
To cut or not to cut (next week)?
Despite the strong decline in price pressures, analysts overwhelmingly expect the ECB to maintain rates at their current record-high levels at its meeting next Thursday (11 April).
All 77 economists polled by Reuters last week predicted that the ECB would hold rates steady next week. However, 88% of those questioned expected the ECB to cut rates in June.
Such projections have been repeatedly corroborated by ECB officials in recent months, who argue that the bank should wait until wage bargaining data is released in May before lowering rates.
“It would be surprising if the ECB cut rates already in April,” Sander Tordoir, senior analyst at the Centre for European Reform (CER), told Euractiv.
“The Governing Council [the ECB’s rate-setting body] has clearly signalled they want to wait for May wage data,” he stressed.
He added: “The insurance bias to guard against a reacceleration of inflation will likely dominate any data releases pointing to faster disinflation.”
Brzeski noted that one potential option for the ECB could be to “pre-announce” a rate cut — similar to what it signalled in June 2022, when the bank said it would begin hiking rates the following month.
“I think now, with the incoming data, the heat will be [on] the ECB,” he said. “So [pre-announcing] could be a nice way out.”
Two months ‘won’t make a difference between stellar growth and stagnation’
The ECB’s tight policy has come under increasing criticism in recent months, with many experts arguing that the bank’s failure to cut rates is exacerbating the eurozone’s lacklustre economic performance.
At its meeting last month, the ECB slashed its forecast growth for the 20-country bloc for 2024 from 0.8% to 0.6%.
Five of Germany’s leading economic research institutes also cut the country’s expected growth for 2024 from 1.3% to just 0.1%, describing the German economy — the eurozone’s largest — as “ailing”.
At a CER-hosted event in Brussels last week, Jeromin Zettelmeyer, director of Bruegel, an influential Brussels-based think-tank, stressed that the ECB already has data showing that eurozone wage growth fell in the final quarter of last year.
He also noted that the ECB’s decision to wait for “a second data point” on wages in the first quarter of this year reflects a “hawkish bias” that could trigger “secular stagnation” — or permanent low growth — across the eurozone.
The ING expert, however, expressed reservations about Zettelmeyer’s analysis.
“I think good monetary policy is not based on a single data observation,” Brzeski said. “To derive an entire trend from just one data observation is a bit far-fetched.”
Whether a cut comes in April or June will not make a “difference between stellar growth and stagnation,” he added.
“The ECB cannot afford to be wrong,” Brzeski stressed. “They only have one job and [that’s] to bring down inflation.”
[Edited by Anna Brunetti/Rajnish Singh]
