Eurostat data for March 2024 showed annual consumer price inflation falling to 2.4%, below expectations of 2.6% and representing a four-month low. The market predicts four cuts in ECB interest rates until the end of 2024, with the first expected in June, Euronews recalls.
Inflation in the eurozone fell more than economists expected last month, which further strengthened expectations for an easing of monetary policy by the European Central Bank in the coming months.
Annual consumer price inflation in the euro area eased from 2.6% to 2.4% in March 2024, according to preliminary Eurostat data released on Wednesday. This marked a four-month low and came in below expectations for steady readings.
Notably, the highest annual rate of inflation in March was in the services sector (4.0%, unchanged from February), followed by food, alcohol and tobacco (2.7%, up from 3.9 % in February), non-energy industrial goods (1.1%, compared to 1.6% in February) and energy (-1.8%, compared to -3.7% in February).
Among the eurozone members, the highest annual inflation rate was recorded in Croatia (4.9%), Austria (4.2%), Estonia (4.1%) and Belgium (3.8%), and the lowest - in Lithuania (0.3%), Finland (0.7%), Latvia (1%) and Italy (1.3%).
Core inflation, which excludes variable food and energy items, eased from 3.1% to 2.9%, hitting a two-year low.
Market expectations, ECB inflation forecasts and future risks
The latest inflation data should be in line with expectations for an ECB interest rate cut in June.
The interest rate market currently reflects the full expectation of four rate cuts by the ECB by the end of 2024, with the first expected to start in June.
Recent public statements by ECB President Christine Lagarde have underscored expectations for a continued decline in inflation in the Eurozone. However, she stressed the need for the ECB's decisions to remain data-driven and determined on a meeting-by-meeting basis.
Ahead of the release of inflation data on Wednesday, ECB member Robert Holtzmann expressed his lack of objections to a June interest rate cut, but still stressed the importance of further supporting data. He also cautioned against diverging interest rate cuts from the Federal Reserve, which could reduce the effectiveness of easy policy.
The ECB's latest forecasts point to average annual headline inflation of 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026.
However, there are growing risks associated with the recent increase in oil prices.
Brent crude has risen 15% since the start of the year, reaching $89 a barrel in early April. ECB economists' forecasts from March assumed an average oil price of $79 a barrel for 2024.
If crude oil prices remain at these high levels or rise further in the coming months, this will inevitably weigh on inflation in Europe, which could delay the ECB's plans to cut interest rates.
The latest inflation data experts
According to Kyle Chapman, currency markets analyst at the Ballinger Group, it is increasingly clear that concerns about secondary effects on wages are overblown and that they do not represent a significant obstacle to the disinflationary path.
Chapman believes the steady trend towards the 2% target is undisputed and that "there will certainly be some dissenters on the Board next week".
"At the very least, there needs to be a serious discussion about what the cut cycle will look like and possibly an advance announcement that they intend to cut in June," he added.
Market reactions
During Wednesday's session, the euro weakened slightly against the US dollar, remaining below the 1.0780 level. This trend reflects investors' expectations of a greater propensity for the ECB to cut interest rates in June compared to the Federal Reserve.
European stock markets made efforts to recover from the previous day's negative close. In Frankfurt, the DAX 40 was up 0.5%, while the CAC 40 and IBEX 35 were up 0.3% each. However, the Euro Stoxx 600 made more modest progress, rising just 0.1%. /BGNES
