Early ECB rate cut unlikely as Euro zone inflation eases less than expected

Latest Eurostat data all but ends speculation ECB policymakers might start cutting interest rates before June

Euro area inflation eased less than anticipated in February appearing to support the European Central Bank’s (ECB) caution about cutting interest rates too soon.

Consumer prices rose 2.6 per cent from a year ago in February, Eurostat said on Friday. That was above the 2.5 per cent rate expected by economists. Core inflation, which excludes volatile components such as food and energy, also moderated less than envisaged, to 3.1 per cent.

The latest figures all but extinguished speculation that ECB policymakers might start cutting interest rates before June on the back of a visible slowdown in price growth across the bloc and a marked slowing of the economy.

Markets are still expecting Frankfurt to implement a sequence of rate cuts later in the year but to proceed with cautious quarter point reductions until the data firmly indicates that inflation is returning to the bank’s 2 per cent target.


The first reduction is expected by June, though odds of a move by then have fallen to about 80 per cent from near certainty as recently as this week.

The latest Eurostat data come just days before the ECB next sets borrowing costs, with economists predicting the deposit rate will be left at 4 per cent for a fourth consecutive meeting. Officials are converging around a first reduction in June, though a minority favours swifter action.

Some politicians would also like cuts to arrive more rapidly as their economies struggle. Portuguese finance minister Fernando Medina was the latest to speak out, telling Bloomberg there’s a “high risk” in keeping policy tight.

“Various European countries are having a very strong slowdown,” he said on Thursday in Sao Paulo. “In some there’s already stagnation and recession. At this moment, the risks of leaving the situation as it is are greater than starting a process of reducing interest rates. The economy has already slowed enough.”

While policymakers are optimistic that inflation is headed toward their 2 per cent goal. They remain concerned that elevated increases in wages and labour costs risk stoking price pressures for longer.

Despite the economic weakness, euro area jobs market remains tight. A separate Eurostat release showed the unemployment rate stayed at a record-low 6.4 per cent in January.

“We watched inflation data coming in from the European and country level, and what we see is that they confirm my view that we have to wait, have to be attentive and can’t rush to a decision,” Austrian central bank governor Robert Holzmann said.

ECB president Christine Lagarde said on Monday that “the current disinflationary process is expected to continue,” but that she and her colleagues need to see more evidence of a sustainable return to the target.

Analysts, too, fret that this week’s numbers mask upticks in month-on-month inflation readings that aren’t distorted by swings in energy costs skewing annual comparisons. – Additional reporting: Bloomberg

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times