Eurozone inflation dropped lower than expected to 2.4% in March, boosting expectations that the European Central Bank (ECB) will cut interest rates by the summer. The data did not weaken the EUR/USD currency pair, but it has increased the chances of an earlier interest-rate cut from the ECB, possibly even an earlier cut in April.
Both the release of the Harmonised Index of Consumer Prices (HICP) and the Unemployment Rate on Wednesday did not impact the pair despite the easing in price pressures. The EUR/USD edged higher on Wednesday and extended the previous day’s recovery from six-week lows.
Eurozone inflation
According to the official data released by Eurostat on Wednesday, the Eurozone annual Harmonised Index of Consumer Prices (HICP) increased 2.4% in March, slowing from a 2.6% rise in February and coming in lower than the market consensus for a 2.6% growth.
The Core HICP inflation eased to 2.9% YoY in March, lower than February’s 3.1% rise and missed the estimates of 3.0%. On a monthly basis, the Eurozone’s HICP rose 0.8% in February compared to a 0.6% increase registered in February. The core HICP inflation came in at +1.1% MoM in the same period, compared to a 0.7% reading previously.
The smaller increases in food and goods prices balanced the steady services prices and helped push annual consumer price growth lower than the previous month’s 2.6%.
ECB monetary policy
The cooling inflation will be welcomed by the ECB, which will meet next week to discuss monetary policy. Most analysts anticipate that ECB policymakers may decide to wait until June before they start cutting interest rates.
Higher wages have continued to push costs up in the services sector, in which prices increased at an annual pace of 4% for the fifth consecutive month.
Diego Iscaro, economist at S&P Global Market Intelligence, said the drop in headline inflation “may raise expectations for a rate cut later this month”. But he indicated that the “stickiness of services prices will make the ECB wait for further evidence of easing wage growth before starting the easing cycle” in June.
Senior ECB policymakers have pointed out that they would likely wait until June so they have more time to examine wage pressures and whether they are easing enough to keep inflation dropping to their 2% target. ECB President Christine Lagarde’s recent comments have highlighted the expectation for inflation to continue to drop, but she underscored that decisions will be based on data and determined meeting-by-meeting. Also, ECB member Robert Hollzman noted that he supports a June rate cut, but he said that such a decision should be based on further supportive data.
Unemployment data
The release of unemployment data by Eurostat on Wednesday has demonstrated that the bloc’s labour market remained robust. The Unemployment Rate in the Eurozone increased to 6.5% in February and was the same as January’s revised 6.5% print.
Challenges to disinflation trend
However, there are rising risks from higher oil prices. Brent crude has risen by 15% since the new year and has reached $89 per barrel in early April. If crude prices remain at these higher levels or rise further in the coming months, they will affect Eurozone inflation, and could potentially slow down ECB rate cut plans.