Economy

Euro zone inflation falls more than expected, firming path to June interest rate cut

Eurostat’s latest flash estimate of the harmonised index of consumer prices for the currency bloc was 2.4% in March

ECB chief Christine Lagarde: she has signaled a first interest rate cut in June, and there is growing consensus around that date. Photograph: Kirill Kudryavtsev/AFP via Getty Images

Eoin Burke-Kennedy
Wed Apr 3 2024 - 10:57

Euro zone inflation fell by more than expected in March, down to 2.4 per cent from 2.6 per cent the previous month, bolstering prospects of a European Central Bank (ECB) interest rate cut in June.

Eurostat’s latest flash estimate of the harmonised index of consumer prices (HICP) for the currency bloc as a whole was less than the 2.5 per cent analysts had predicted.

The underlying or core rate of price growth, which excludes volatile items such as food and energy, also eased more than anticipated to 2.9 per cent.

The figures add to the narrative that inflation is on track to return to the ECB’s 2 per cent target, allowing for an easing of interest rates in the coming months. ECB chief Christine Lagarde has signalled a first cut in June – informed by fresh forecasts and an update on wage growth in the early months of the year.

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Most of the ECB’s governing council – including officials from Germany, France and Spain – have signed up to that timeline, with few clinging to hopes of an earlier move. Economists and money markets are equally aligned, suggesting it would take a big shock to change course.

ECB chief economist Philip Lane appears more cautious, insisting wage increases must continue to retreat for him to consider reversing some of the ECB’s past rate hikes.

While a key compensation gauge showed some moderation at the end of 2023, salaries continue to expand by more than 4 per cent, which has maintained price pressures in services, where labour has an outsize impact on final costs.

Eurostat noted that services sector prices had the highest annual rate of increase in March (4 per cent), followed by food, alcohol and tobacco (2.7 per cent) and energy (-1.8 per cent).

Much of the decline is being driven by falling energy prices internationally.

Across the region trends also diverge. Ireland’s HICP, published on Tuesday, fell below 2 per cent to 1.7 per cent for the first time in three years. Spanish inflation on the other hand accelerated after the government removed some of the supports put in place there to keep a lid on energy costs, and Italy also saw an uptick. Meanwhile, German and French readings both showed that inflation eased for a third successive month. – Additional reporting by Bloomberg

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times

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