April 23. 2024. 7:06

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Eurozone inflation drops to lowest in 2 years, spurring talk of ECB rate cut

The eurozone’s core inflation rate dropped to its lowest level in nearly two years in February, bolstering hopes that Europe’s inflation crisis may have permanently abated and that the European Central Bank (ECB) will cut interest rates later this year.

A flash estimate published on Friday (1 March) by Eurostat, the EU’s official statistics office, found that core inflation — which strips out volatile food and energy prices — fell to 3.1% in February, down from 3.3% in January: the lowest rate since March 2022.

Headline inflation also declined, dropping from 2.8% to 2.6% from January to February — well below the 10.6% peak reached in October 2022 and only marginally above the ECB’s 2% target rate.

Prices soared across Europe following Russia’s full-scale invasion of Ukraine in February 2022. In response, the ECB raised interest rates on ten consecutive occasions between July 2022 and September 2023, bringing its benchmark deposit facility rate from negative levels to a record high of 4%.

Expectations of a summer rate decrease were further bolstered by comments made over the past week by members of the ECB’s Governing Council, the bank’s main decision-making body.

‘Lagarde has slightly changed her emphasis’

Analysts’ expectations of a rate cut later this year were also recently corroborated by ECB President Christine Lagarde’s discernibly less hawkish stance on the potential impact of rising wages on prices.

Last year, Lagarde repeatedly warned about the risk of salary hikes triggering a wage-price spiral, whereby rising wages cause a surge in prices, which in turn leads salaries to increase further.

But in a speech delivered to the European Parliament in Strasbourg on Monday (26 February), Lagarde said rising labour costs, rather than “being fully passed onto consumers”, are now being “partly buffered by profits”.

“Lagarde has slightly changed her emphasis from warning about wage-price spirals to emphasising that wages can partly catch up with lost purchasing power without becoming inflationary,” Sander Tordoir, a senior economist at the Centre for European Reform, told Euractiv.

“She is preparing the ground for ECB rate cuts later this year, without over-committing,” he added.

Tordoir’s analysis was echoed by Philipp Lausberg, an analyst at the European Policy Centre. “With rhetoric like this, Lagarde is preparing people for a June cut,” he told Euractiv.

Trade unions, as well as some experts, have been highly critical of the ECB’s tight monetary policy over the past two years, arguing that at best it had a marginal impact on curbing prices and at worst may even have exacerbated Europe’s economic malaise.

“Interest rate hikes weren’t the best tool to address current inflationary pressures,” Sebastian Mang, a senior policy officer at the New Economics Foundation (NEF), told Euractiv.

“The ECB and national governments should look to address underlying weaknesses that expose the EU to such inflation shocks — including by supporting investment in clean energy and building retrofits to reduce our reliance on volatile fossil fuels,” he added.

According to the IMF’s latest forecast, the eurozone is expected to grow by just 0.9% this year — 0.3 percentage points less than projected in October.

The IMF attributed the eurozone’s weak economic performance to the “lingering effects of high energy prices and weakness in interest-rate-sensitive manufacturing and business sentiment”.

Germany, the eurozone’s largest economy and manufacturing powerhouse, also recently downgraded its own growth forecast for 2024 from 1.3% to 0.2%.

The country’s economy minister, Robert Habeck, described Germany’s economic performance as “dramatically bad” last week.

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