Eurozone inflation eased to 2.2% in March, its lowest level in four months, sparking speculation that the European Central Bank (ECB) may opt for a rate cut at its meeting on April 17. However, despite the headline inflation figure cooling more than expected, rising monthly prices and persistent inflation in services are creating a divided outlook within the ECB.
Eurostat’s preliminary estimate, released on Tuesday, showed that consumer prices in the euro area rose by 2.2% year-over-year in March, which is just below the 2.3% consensus forecast and the lowest since November 2024.
Core inflation, excluding volatile energy and food prices, dropped to 2.4% from 2.6% in February, slightly better than the expected 2.5%. However, monthly figures tell a different story. Headline inflation rose 0.6% from February, marking the sharpest month-on-month increase in nearly a year. Core inflation also saw a 0.8% rise from the previous month, the highest since March 2024. Furthermore, food, alcohol, and tobacco prices continued to climb, up 2.9% annually, a slight increase from February’s 2.7%.
Services inflation, a crucial indicator for the ECB due to its link to wage growth and domestic demand, slowed to 3.4% annually from 3.7% in February, reaching its lowest level since June 2022. However, a monthly increase of 0.4% suggests that underlying price pressures remain significant.
Geographically, inflation varied across the currency area, with France reporting the lowest annual inflation at 0.9%, while countries like Estonia, Croatia, and Slovakia saw inflation rates as high as 4.3%. On a monthly basis, Greece, Portugal, and Italy experienced substantial price hikes, whereas Belgium, Estonia, and Luxembourg saw price declines.
Goldman Sachs’ chief European economist, Sven Jari Stehn, noted that core inflation is on track to meet the ECB’s 2% target by the end of the year, despite the current pressures. He pointed out that monetary policy is still restrictive, with the deposit rate at 2.5%. However, Stehn also highlighted the downside risks posed by potential US tariffs, which could impact Eurozone growth significantly.
Economist Ruben Segura-Cayuela from Bank of America remained cautious, seeing a trend of inflation undershooting expectations. He suggested that the risks of a rate pause in April have risen, and that communication from the ECB will likely be more uncertain in the coming weeks.
ABN Amro’s Bill Diviney echoed similar sentiments, noting that while the March rate cut was anticipated, April’s decision remains more uncertain. He suggested that June could be a more appropriate time for the next move, as the ECB continues to assess the impact of fiscal policies, trade risks, and persistent services inflation.
With inflation still above the ECB’s target, the central bank faces a tough decision on whether to ease monetary policy further in April or to wait for more data before taking any action.
