Euro zone inflation held steady as expected in April but a crucial indicator on underlying price pressures slowed, solidifying an already strong case for the European Central Bank to cut interest rates in June.
The ECB all but promised a rate cut on June 6, provided there is no nasty surprise in wage or price developments, and Tuesday's data remain consistent with the path the bank saw in its last round of projections in March.
Inflation in the 20 countries sharing the euro currency was 2.4% in April, the same as in March and matching expectations for a steady reading in a Reuters poll of analysts.
Meanwhile core inflation, filtering out volatile food and energy prices as well as alcohol and tobacco, a key measure watched by policymakers to gauge the durability of price pressures, slowed to 2.7% from 2.9%, data from Eurostat, the EU’s statistics agency showed.
Closely watched services inflation, stuck at 4% since the start of the year, eased to 3.7%, though much of that may be related to the early timing of Easter and policymakers say that rapid wage growth, the key component in services costs, remains a concern.
Inflation has fallen quicker in the past year than the ECB had hoped, so potential rate cuts have dominated the discussion for months now, even if policymakers say they are still looking for more reassuring data, especially on wages.
The ECB raised interest rates at the fastest pace on record in 2022 and 2023 to combat runaway prices but has been holding the deposit rate steady at 4% since September, arguing that it has done enough to restrict demand and extinguish price pressures.
Still, some policymakers appear to be walking back on earlier comments that the June cut should be followed by a series of moves since inflation was well on its way to the 2% target by sometime in 2025.
Increased caution is fuelled by rising energy costs and heightened geopolitical tensions, which threaten to disrupt shipping and push up commodity prices, a risk for a large open economy that depends on trade and raw material imports.
But unexpectedly high inflation readings in the United States may be a bigger concern since that could delay rate cuts from the U.S. Federal Reserve.
While the ECB insists it is independent, the Fed's moves dictate the direction of global financing conditions and a widening interest rate spread would weaken the euro and push up imported inflation. It would also push up long-term yield in the euro zone, effectively negating some of the ECB’s work to lower borrowing costs.
Still, policymakers argue that being a step or two ahead of the Fed is not a problem and issues arise only if Fed easing is postponed over a longer period or if higher U.S. inflation is exported to the euro zone as well.
