Euro Area Inflation Slows, Strengthening Case for ECB Rate Cuts

Euro area inflation eased in March, primarily due to a slowdown in services cost growth, reinforcing expectations for further interest rate cuts from the European Central Bank (ECB).

The Harmonized Index of Consumer Prices (HICP) rose 2.2% year-on-year in March, slightly lower than February’s 2.3% increase, according to Eurostat's flash data released Tuesday. The figure was in line with market expectations.

Core Inflation & Sectoral Trends

Core inflation, which excludes food, alcohol, and tobacco prices, declined to 2.4% from 2.6% in the previous month, compared to the expected slowdown to 2.5%.

• Food price growth accelerated to 2.9% from 2.7%.

• Energy prices dropped 0.7%, reversing February’s 0.2% increase.

• Services costs rose at a slower pace of 3.4%, down from 3.7%.

• Non-energy industrial goods prices remained steady at 0.6%.

On a monthly basis, the HICP increased 0.6% in March. Final inflation data will be released on April 16.

ECB Rate Cut Expectations

The latest inflation data support predictions that the ECB will reduce interest rates by 25 basis points later this month, according to Capital Economics economist Jack Allen-Reynolds.

In March, the ECB lowered rates for the fifth consecutive policy session, cutting the deposit rate by 25 basis points to 2.5%, marking its lowest level since February 2023. The central bank had hinted at pausing the easing cycle, as monetary policy was seen as becoming less restrictive.

Inflation Trends Across Major Economies

• Germany’s inflation eased to 2.3% in March from 2.6% in February.

• France’s inflation remained unchanged at 0.9%.

• Spain’s inflation dropped to a five-month low of 2.2%.

• Italy’s inflation accelerated to 2.1%, up from 1.7%.

Euro Area Unemployment Data

Separate official data revealed that the euro area unemployment rate declined to 6.1% from 6.2% in January, compared to 6.5% in the same period last year.

• The number of unemployed people fell by 70,000 from the prior month, bringing the total to 10.58 million.

• However, the youth unemployment rate rose slightly to 14.2% in February, up from 14.1% in January.

Market Outlook

With inflation cooling and unemployment improving, investors and analysts will closely monitor the ECB’s monetary policy moves in the coming weeks. The potential rate cut could provide further stimulus to the euro area economy, shaping market sentiment in the near term.