Eurozone Inflation Slows, Fueling Rate Cut Speculation

Inflation in the eurozone eased as expected last month, with a key measure of underlying price pressures also declining. This trend is likely to bolster widespread expectations for another interest rate cut by the European Central Bank (ECB) at the end of April.

Consumer prices across the 20 countries using the euro increased by 2.2% year-over-year in March, down from 2.3% in February, aligning with a Reuters poll forecast. This slowdown was driven by a sharp drop in energy costs and a deceleration in services inflation, according to Eurostat data released on Tuesday.

Core inflation, which excludes volatile food and energy prices, fell from 2.6% to 2.4%, below the predicted 2.5%. This unexpected dip is likely to reassure ECB policymakers, who have long been concerned about persistently high inflation.

Markets Eye ECB Rate Cut Amid Stagnant Growth

The ECB has already slashed interest rates six times since June last year. With economic stagnation, declining energy prices, and a strengthening euro, investors are increasingly convinced that another rate cut will come on April 17.

However, a recent rise in long-term bond yields has partially undone the ECB’s efforts to lower borrowing costs. While inflation concerns have eased, an impending trade war with the United States looms as a significant risk to the eurozone economy.

Tariffs and subsequent retaliatory measures tend to slow growth and push prices higher, potentially leading to an economic scenario known as stagflation—a mix of stagnation and high inflation. Despite this, ECB Vice President Luis de Guindos recently argued that the economic damage from a trade war would be severe enough to suppress inflationary pressures, resulting in only a short-lived price spike.

Potential Economic Impact of a Trade War

ECB President Christine Lagarde has warned that a trade war could shave 0.5 percentage points off eurozone growth—a substantial hit given that the region’s economy grew only 0.9% in 2023.

Meanwhile, the slowdown in services price inflation—down to 3.4% from 3.7%—supports policymakers' expectations that wage growth deceleration is gradually easing inflationary pressures. Services inflation has been a persistent issue, hovering around 4% for most of 2024, challenging the ECB’s outlook on wage-driven inflation.

However, food price inflation accelerated, with unprocessed food costs surging 4.1% year-over-year.

Market Bets on Rate Cuts

Financial markets are now pricing in a 70% to 75% chance of an ECB rate cut in April, with a full move expected by June. Analysts anticipate further rate reductions in 2025, with the ECB deposit rate forecasted to drop to 2.00% or 1.75% by year-end.

With inflation cooling, economic growth stagnating, and external risks mounting, the ECB faces increasing pressure to act decisively. The April policy meeting could mark a turning point for monetary policy in the eurozone as the central bank seeks to balance inflation control with economic stimulus.