Following today’s news from the EU that Eurozone inflation has dropped further than expected, at 2.4% to the end of March compared to 2.6% in February, what does this mean for the prospects of an interest rate cut happening sooner rather than later from the European Central Bank?
Commenting on the inflation data, Natasha May, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) said:
“Today’s eurozone inflation release will elicit sighs of relief in the ECB, with headline and core inflation both once again moving lower. But looking under the surface of March’s inflation numbers suggests the central bank’s Governing Council shouldn’t be popping the champagne corks just yet.”
“Services inflation – the biggest component in the eurozone inflation basket – appears stuck at 4% year-on-year, well above the ECB’s 2% target. These prices are mainly driven by domestic labour costs, which remain high thanks to strong wage growth and weak labour productivity. Of course, there was some good news in today’s print: past commodity price declines and smoother supply chains mean core goods inflation continues to slow, and food prices are still decelerating. But relying on volatile commodity prices for sustainable disinflation is a risky business – it’s the labour market that’s driving underlying price pressures.”
“The ECB has given a strong signal that June will see the first rate cut. To fulfil this guidance, then, more evidence of cooling wage growth – and therefore services inflation – will be needed. If not, markets may end up disappointed.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) said:
“The downside surprise in Eurozone inflation is likely to cement market expectations that the European Central Bank will likely start its rate cutting cycle in June.
“While there’s a degree of stickiness in the services component, non-energy industrial goods inflation continues to slow, alongside food. Plus, energy disinflation continues too, though to a lesser degree than previously. Alongside this, even though the labour market remains resilient and there are tentative signs that the economy might be bottoming out, the pace of economic growth is likely to stay weak in the near term.
“This is why we think the central bank has room to cut. Inflation is slowing, maybe unevenly – but it is, and growth is weak, perhaps holding up relative to previous recession expectations, but remaining sluggish nonetheless. Lower inflation and weaker growth do call for lower rates.
“That said, we also think that monetary policymakers would be gradual in their rate reductions, not sharp. Markets have now converged to our view, shifting from pricing in significant rate cuts to more moderate ones, in line with our base case.”
