Eurozone Inflation Falls Again, ECB Meeting in Focus

No interest rate cut expected at the European Central Bank meeting next week, despite fall in annual inflation to 2.6%

Sara Silano 1 March, 2024 | 12:24AM
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Inflation in the eurozone fell to 2.6% year on year in February, down from 2.8% in January, according Eurostat's flash estimate, but higher than economists' expectations. The European Central Bank is expected to revised inflation expectations lower at the meeting on March 7, but to leave interest rates unchanged.

“Inflation in the Eurozone continued its downward trend in February, with prices rising by just 2.6%, down from 2.8% in January, and 2.9% in December. This was slightly higher than expectations of a 2.5% rise, but at least things are moving in the right direction,” said Michael Field, European market strategist at Morningstar.

Core inflation, which shows prices without energy and food costs, also fell to 3.1% year on year. It was at 3.3% in January.

In February, the greatest contributors to eurozone inflation were food, alcohol and tobacco (+4% year on year), followed by services (+3.9%), non-energy industrial goods (+1.6%) and energy (-3.7%), according to Eurostat estimates.

“Core inflation also followed suit, coming in at 3.1%, with this number falling month on month since July 2023, confirming that record high interest rates are indeed having a discernible impact,” added Field. “Together these numbers serve to strengthen calls for the ECB to cut rates, possibly sooner rather than later.” 

Will the ECB Cut Interest Rates on March 7?

The slowdown in price rises reinforces speculation that the European Central Bank (ECB) will revise inflation estimates downward at its March 7 monetary policy meeting.

European stock markets rose after the data was released.

“Despite being close to their respective inflation targets, central bankers in the United States and Europe seem hesitant to cut rates,” said Jonathan Gregory, head of UK fixed income at UBS Asset Management in a recent note.

“We said in January that market prices were running ahead of schedule with regard to the magnitude of the rate cut already discounted for the United States and the Eurozone by the summer of 2024.

“As we write, market expectations imply that the Federal Reserve and European Central Bank will each cut rates twice by the end of July (assuming 0.25 percent for each move), compared to the nearly four cuts discounted for the same period a few weeks ago. Current pricing seems much more reasonable to us.”

ECB will continue to monitor wage data. “After the peak of the pandemic, there was no significant labour market movement, and this fuelled wage inflation,” said Emile Gagna, economist at Candriam, who thinks that “the European Central Bank will remain vigilant to ensure that this wage dynamic does not contribute to destabilising inflation expectations and fueling price increases.” However, risk seems to be limited, according to Gagna’s forecast.

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Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy

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