Inflation in the EU falls more than expected but the ECB does not cut rates

The first rate cut by the ECB could arrive between June and July. The cautious step of the Governing Council of the European Central Bank is therefore confirmed, which also decided not to touch interest rates at today's meeting. “We see signs, but not enough to be confident enough” about the situation and the end of high inflation. “We need more data, and we would have enough data in June,” explains Christine Lagarde, President of the ECB at the end of the Governing Council meeting.

Currently, the level of inflation in the Eurozone, according to the latest Eurostat measurements, stood at 2.6% in February, down compared to 2.8% in January, while the core inflation is instead at 3.1%, too high to make the ECB move: “Since the ECB has been in charge of defining interest rates for the Eurozone, it has lowered them 21 times, and never when core inflation was above 2.2%. ECB rate cut in June is therefore the most likely scenario”, comments Sylvain Broyer, Chief Economist EMEA at S&P Global Ratings. However, when the ECB starts to cut rates, we should not expect too risky moves. Most likely “it will proceed cautiously with conventional 25 basis point steps”, explains Konstantin Veit, Portfolio manager at Pimco, who adds that “three cuts starting in June or later are expected for 2024. The key is the trend in wages.”

The latter aspect was also underlined by Lagarde who explained how she will continue to “observe the evolution of the economy, of the labor market, and how wages will behave. All these factors will be taken into consideration to determine our future moves”. Finally, Carlo Cottarelli, the government's former extraordinary commissioner for the spending review, also expressed his opinion on the behavior of the ECB, who, speaking at the Festival del Management, explained the prudence of the ECB as a loss of credibility on the part of the doves: “In 2021 and 2022 the so-called doves lost credibility by saying that inflation was not a problem and that there was no need to increase interest rates. And now the hawks have a good time saying 'you were wrong before, now listen to us'. Otherwise perhaps rates would have already fallen.”

Inflation trend forecast

According to the latest forecasts published today by the ECB, inflation has been revised downwards, in particular for 2024, due to the lower contribution of energy prices. Experts indicate that it would now average 2.3% in 2024, 2% in 2025 and 1.9% in 2026. Same dynamic for inflation net of energy and food which sees an average of 2.6% in 2024, 2.1% in 2025 and 2% in 2026. The growth data are less brilliant as they have been revised downwards: for 2024 to 0.6%, to 1.5 % in 2025 and 1.6% in 2026.

Finally, the Governing Council of the ECB today also discussed the topic of the capital markets union: “We have decided to update it and agreed on a new communiqué which establishes the imperative to move forward and quickly”, concludes Lagarde.