Eurozone Inflation Rate Drops to a Two-Year Low of 2.4%

Inflation within the eurozone plummeted to 2.4% in March, marking its lowest level in over two years. This decline intensifies pressure on the European Central Bank (ECB) to take action, potentially becoming the first major authority to cut interest rates this year.

Official data from the 20-country single currency area unveiled a notable dip in average consumer price inflation from 2.6% to 2.4% last month, surpassing economists’ expectations of a more modest decline to 2.5%. This slowdown in inflation signifies the weakest pace of price increases since July 2021, coupled with a notable deceleration in core inflation from 3.1% to 2.9% in March.

Anticipated declines were foreshadowed by data from Germany, the European Union’s largest economy, which reported a decrease in inflation to 2.2% in March, inching closer to the ECB’s targeted 2% threshold. Notably, Ireland and Lithuania have already witnessed average inflation dipping below 2%, attributed to elevated interest rates dampening borrowing demand and economic growth.

With the ECB’s next interest rate decision due next week, analysts widely anticipate the maintenance of the main interest rate at 4% for the seventh consecutive month. However, mounting pressure on the central bank to initiate monetary policy easing by June looms large in light of sustained disinflation and growth deceleration.

Daniele Antonucci, Chief Investment Officer at Quintet Private Bank, noted the call for lower rates amidst dwindling inflation and weakened growth, suggesting policymakers adopt a gradual approach to rate reductions.

The downturn in eurozone inflation for March was chiefly driven by a further softening in energy prices, witnessing an annual inflation drop of 1.8% compared to the previous year. Additionally, food price inflation moderated from 3.9% to 2.7% last month.

While Croatia recorded the highest headline inflation at 4.9% in March, Lithuania (0.3%) and Finland (0.7%) marked the lowest inflation rates within the single currency area.

Analyst Natasha May from JP Morgan Asset Management cautioned against premature celebration, highlighting the persistent inflation in the services sector, predominantly influenced by robust wage growth and tepid labour productivity. May emphasized the ECB’s signaling of an impending rate cut in June, contingent upon evidence of subdued wage growth and services inflation.

Traders foresee a global trend of major central banks, including those in the US, UK, and eurozone, commencing interest rate cuts in June, signalling progress in containing inflationary pressures. This follows a period of rate hikes prompted by escalating energy and food prices post-pandemic and Russia’s invasion of Ukraine.

As inflation remains at 2.4% in the eurozone, 3.2% in the US, and 3.4% in the UK, discussions surrounding interest rate adjustments and inflation containment strategies dominate monetary policy deliberations across advanced economies.

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Eurozone Inflation Rate Drops to a Two-Year Low of 2.4%