The latest data shows weaker eurozone inflation in March with headline running at 2.4% year-on-year, below the consensus forecast of 2.6%. Core inflation was also lower than anticipated at 2.9% YoY versus a consensus forecast of 3.1%.
The main reason for the fall is a drop in core goods inflation, while services inflation – the European Central Bank’s (ECB) focus – remained stuck at 4.0% YoY for the fifth consecutive month. There is, however, an ‘Easter effect’: this sustained services inflation in March and should partly reverse in April.
Looking for more moderate services inflation
ECB President Christine Lagarde has laid a lot of emphasis in recent comments and speeches on the importance of seeing services inflation clearly moderate. So it was no surprise that the ECB held policy rates steady on 11 April. At the same time, it signalled it was considering a cut at its meeting in June.
The ECB said its benchmark deposit rate would stay at 4 % until the governing council was sure price pressures had stabilised.
Before the June meeting, policymakers will receive inflation data for April and May, data on first quarter negotiated wages, alongside a host of other activity indicators. We expect these data to provide no obstacle to a June rate cut.
US inflation rises again
The future trajectory of ECB policy rates, however, became a bit less certain after data showed a 3.5% increase in US consumer prices compared to March a year ago. This compared with forecasts of a 3.4% rise. US core inflation also exceeded expectations due to price pressures in services sectors such as healthcare and car insurance.
Markets responded to the US inflation data by reducing the probability they assign to near-term Federal Reserve rate cuts, with now only a 50% likelihood of a cut before September.
Developments in the US led markets to also scale back their expectations of how many rate cuts the ECB would make over the course of the year. Some eurozone policymakers may want to avoid cutting rates much more aggressively than the US Fed, partly out of concerns over weakening the euro and so stoking (imported) inflation.
President Lagarde, however, emphasised in her latest press conference that the ECB was not ‘Fed dependent’.
In our view, a cut in June looks likely, but with subsequent monetary policy at the ECB very much dependent on subsequent economic data.
Disclaimer
This material is issued and has been prepared by BNP PARIBAS ASSET MANAGEMENT UK Limited (“BNPPAM UK”). Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. BNPPAM UK is regulated by the FCA under UK laws, which differ from Australian laws. In Australia, BNPPAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services. This material is distributed in Australia by BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418. This material is produced for information purposes only and does not constitute:
an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
investment advice.
Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.
Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material. Past performance is not a guide to future performance and the value of the investments in financial instrument(s) may go down as well as up. Investors may not get back the amount they originally invested. The performance date, as applicable, reflected in this material, does not take into account the commissions, costs incurred on the issue and redemption and taxes. All information referred to in the present material is available on www.bnpparibas-am.com.
