(Bloomberg) — Euro-area inflation slowed more than initially reported in February, strengthening arguments for the European Central Bank to keep cutting interest rates.
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Consumer prices rose an annual 2.3% — less than the 2.4% Eurostat first flagged. Wednesday’s revision follows an unexpected drop in Germany’s inflation rate.
With the outlook for economic expansion and inflation in Europe clouded by uncertainty, ECB officials debating whether to pause or lower borrowing costs again next month may be tempted to focus on the clear progress in reaching their 2% target.
There have been other encouraging signs: Wage growth has moderated, inflation expectations remain anchored and gains in services prices have begun to ease.
What Bloomberg Economics Says…
“The broad inflation outlook remains relatively benign. The ECB has already cut its deposit rate by 150 basis points since the cyclical peak and, at 2.5%, borrowing costs are in the vicinity of what we think is neutral. Absent a big surprise, we therefore expect the Governing Council to adopt a more cautious approach to further easing, with the next rate cut coming in June.”
—Jamie Rush, chief European economist. Click here for full REACT
But there are also risks that inflation will rebound. Trade tensions with the US, and a jump in defense and infrastructure spending could yet drive prices higher more quickly.
“We are convinced that the process of disinflation and convergence toward the 2% target will occur in the coming months,” ECB Vice President Luis de Guindos said on Wednesday in Madrid, cautioning that “the current situation is one of high uncertainty.”
The ECB already pushed back the timeline for reaching its target to early next year, with President Christine Lagarde arguing that policymakers must be “extremely vigilant” and agile in responding to data as they arrive.
Economists surveyed by Bloomberg still predict two cuts in borrowing costs — in April and June — before the deposit rate settles at 2%. Markets are torn on what will happen next month, though they’re leaning toward two moves in total before year-end.
Speaking on Wednesday, Bank of France Governor Francois Villeroy de Galhau emphasized that investor bets on further easing are baked into the ECB’s projections.
“These forecasts integrate a margin for additional rate cuts,” he said. “The calendar and size will depend on data. This is very normal in the uncertain environment we are in.”