Expectations that the European Central Bank (ECB) may start cutting interest rates in April have dimmed after euro-zone inflation eased less than anticipated at the start of the year.
After a pickup in December driven by base effects, consumer prices rose 2.8 per cent from a year ago in January, Eurostat said on Thursday. That is above the 2.7 per cent median estimate in a Bloomberg survey of economists.
Core inflation, which omits volatile components such as food and energy, also abated less than envisaged, to 3.3 per cent.
The latest figures are likely to reinforce the ECB’s argument that rate cuts should not be rushed.
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They also come amid warnings from several policymakers, including Irish Central Bank governor Gabriel Makhlouf, that while headline inflation is falling, price growth in the services sector, underpinned by wage growth, is proving stickier-than-expected.
After an unprecedented barrage of rate hikes between July 2022 and September 2023, the ECB has opened the door to loosening monetary policy this year. Officials, though, are wary of providing clear guidance on timing before they’re sure price growth is firmly on its way back to the 2 per cent target.
ECB president Christine Lagarde said last week that Frankfurt wants to be “further along the disinflation process to be sufficiently confident”. This week, she signalled that a move before June’s meeting is unlikely by describing eagerly awaited wage data due just before that as “critically important”.
In the US, the Federal Reserve has also sought to temper easing expectations, with chairman Jerome Powell on Wednesday pouring cold water on talk of a March cut.
Mr Powell – speaking after the end of a two-day policy meeting – suggested the central bank will cut rates only with more evidence that inflation was moving towards the 2 per cent target.
“We believe it will take a bit longer for the Fed to accumulate more evidence on inflation and get more clarity on how monetary policy transmission works its way through to the economy,” said Anna Stupnytska, global economist at Fidelity International.
The Bank of England, meanwhile, kept interest rates unchanged on Thursday, after officials split three ways on the right course for policy and governor Andrew Bailey said he wanted more evidence inflation was unequivocally on a downward path.
Six out of nine members of the UK central bank’s monetary policy committee voted to keep rates at a 15-year high of 5.25 per cent.
It marked the first time since August 2008 – early in the global financial crisis – that different policymakers have voted to move interest rates up and down at the same meeting.
“We need to see more evidence that inflation is set to fall all the way to the 2 per cent target, and stay there, before we can lower interest rates,” Mr Bailey said.
The market reaction to the latest euro-zone inflation figures was muted. Traders are pricing almost six quarter-point rate cuts this year and see a near 90 per cent chance of the first coming by April. German two-year bonds – among the most sensitive to changes in monetary policy – held losses, with the yield trading five basis points higher at 2.47 per cent.
The ECB predicts more disinflation this year, but at a much slower pace than in 2023, when price gains plummeted to as low as 2.4 per cent in November. It still only expects to reach its goal in 2025.
Economists’ projections differ widely – underscoring uncertainty from geopolitics tensions to armed conflicts and elections. But they see rates being cut later than markets, in June.
The inflation picture is also divergent among the euro area’s biggest members, cooling last month in Germany and France but accelerating in Italy and Spain. – Bloomberg/Reuters
