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
