By Balazs Koranyi
FRANKFURT (Reuters) – Euro zone inflation dipped a bit less than expected last month but its most closely watched component also dropped, sealing the case for another ECB interest rate cut on Thursday and solidifying bets for further policy easing in the coming months.
Consumer price inflation in the 20 nations sharing the euro slowed to 2.4% in February from 2.5% a month earlier, just above expectations for 2.3% and moving a step closer to the European Central Bank’s 2% target, data from Eurostat showed on Monday.
Excluding volatile food and fuel prices, a closely watched ‘core’ figure, also slowed to 2.6% from 2.5% as services inflation, a key worry for most of the past year, finally started to move lower, possibly breaking out of a stubbornly high range.
The key upside surprise came in unprocessed food prices with inflation for this component more than doubling to 3.1%.
The ECB has cut interest rates five times already since last June in a nod to quickly slowing inflation and the bank is expected to keep on cutting as the need to prop up weak economic growth is starting to override concerns about excessive price growth.
The euro zone economy has been broadly stagnant for much of the past two years and there is little to suggest that a long-predicted recovery is starting to take shape.
Industry is in recession and an escalation of trade tensions with the United States is keeping firms from investing. Households, who are sitting on ample financial buffers are meanwhile holding back spending, losing confidence given the relentless negative news flow about trade, recession and Ukraine.
All these suggest that the ECB will cut its 2025 growth forecast for the fourth straight quarter on Thursday as negative growth risks continue to materialise and predictions for a consumption boom have been proven wrong time and again.
The weak outlook would justify even more rate cuts to give the economy a boost but some policymakers continue to express fears that services, a vital domestic component of inflation, is still too high and could perpetuate price growth if the ECB stepped off the brakes too early.
Easing those fears, services inflation, the largest component in the consumer price basket, slowed to 3.7% from 3.9% last month after hovering near 4% for most of the past year.
A further drop is also on the cards as wage growth is finally slowing and most pay agreements between firms and unions point to only moderate wage increases, which would be consistent with the ECB’s inflation target.
The ECB will next meet on Thursday and a rate cut to 2.5% was seen as a done deal even before the February inflation print.
Markets then see between two and three more cuts this year, taking the ECB’s deposit rate to either 2% or 1.75% in December, the bottom end of estimates for the so-called neutral rate, which neither slows nor stimulate growth.
Economists, however, argue that risks are skewed towards an even lower rate since inflation is no longer a real worry and the bloc faces more economic pain from a trade war with the U.S. administration, waning confidence and expensive energy.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
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