Eurozone inflation remained stable in April, strengthening the argument for a potential rate cut by the European Central Bank (ECB)
Eurozone inflation held steady at 2.4% in April, as anticipated, but core inflation, which excludes volatile items such as food, energy, alcohol, and tobacco, dipped to 2.7% from 2.9% in March, slightly above the expected 2.6%. The deceleration in core inflation, a key metric for policymakers, strengthens the case for the European Central Bank (ECB) to consider an interest rate cut in June.
The ECB has signaled a potential rate cut on June 6, contingent upon there being no major surprises in wage or price trends. The latest data aligns with the ECB’s projections made in March.
Despite the easing of services inflation to 3.7% from 4%, partly due to the timing of Easter, policymakers remain vigilant about the impact of rapid wage growth on services costs.
Inflation has fallen faster than the ECB had projected over the past year, prompting talks of potential rate cuts. Nonetheless, policymakers are seeking further confirmation from data, especially regarding wage growth.
The ECB rapidly raised interest rates in 2022 and 2023 to counter inflation but has kept the deposit rate at 4% since September, believing it has taken sufficient action to curb demand and manage price pressures.
Now, some policymakers are re-evaluating prior expectations of a series of rate cuts following the anticipated June cut, as inflation seems poised to reach the 2% target by 2025. Caution arises from potential spikes in energy costs and geopolitical risks, which could disrupt trade and elevate commodity prices, affecting the eurozone’s export-driven economy.
High inflation in the United States might delay the Federal Reserve’s rate cuts, impacting global financial conditions. Though the ECB stresses its independence, the Fed’s actions affect global financial markets. A growing interest rate gap could weaken the euro and increase imported inflation, potentially offsetting the ECB’s efforts to reduce borrowing costs.
Policymakers assert that keeping pace with the Fed is not a primary concern, but any prolonged delay in Fed easing or increased US inflation affecting the eurozone could create challenges.
