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Talks of ECB rate cut gather further strength as Eurozone inflation remains steady

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Closely watched services inflation has eased to 3.7%, after remaining stagnant at 4% since the year's beginning

The European Central Bank’s (ECB) case for lowering interest rates in June 2024 has been strengthened further by the April inflation data for the eurozone. Price rises in the euro area held steady at 2.4% in April, while the economy returned to growth in the first quarter of 2024.

Headline inflation of 2.4% was in line with the forecast of economists polled by Reuters. Every month, the ratio was at 0.6%. It is the seventh straight month the headline rate has been below 3%, despite a slight rebound in the rate in December 2023 due to energy prices.

As long as wage/price developments don’t come as a nasty surprise and data stay on course with the bank’s previous round of projections from March 2024, the European Central Bank virtually guaranteed a rate cut on June 6.

Data from Eurostat, the EU’s statistics agency, revealed that core inflation, which removes volatile prices for food, energy, tobacco, and alcohol, decreased to 2.7% from 2.9%. Policymakers use core inflation as a key indicator to assess how long price pressures will last.

Closely watched services inflation has eased to 3.7%, after remaining stagnant at 4% since the year’s beginning. The impact of a lower year-on-year price of energy continued to moderate, coming in at -0.6% versus -1.8% in March. However, policymakers express concern about the rapid wage growth that drives up service costs, and much of this can be attributed to Easter falling early.

Price increases in services, a key watcher for the European Central Bank, cooled to 3.7% from 4%. The region’s GDP, meanwhile, rose by 0.3% over the first three months of 2024, slightly better than consensus economist expectations. GDP for the fourth quarter of 2023 was revised from no growth to a 0.1% contraction, which means that the eurozone was in a technical recession in the second half of last year.

The talk of possible rate cuts has dominated the agenda for months as a result of inflation declining more quickly in the past year than the European Central Bank had anticipated. However, policymakers say they are still looking for more reassuring data, especially on wages.

Market expectation, however, is mounting for the ECB to start cutting interest rates at its next monetary policy meeting on June 6. Money market pricing currently indicates a nearly 70% probability of a June trim, according to LSEG (London Stock Exchange Group) data, with even higher bets on a cut in July or September of this year.

A host of voting ECB members told CNBC that they were anticipating an interest rate reduction in June, citing the need to prevent an excessive slowdown in the European economy. They also flagged risks from oil prices and geopolitical volatilities in the Middle East.

“The fact that services inflation fell for the first time in six months, serves as a more important development that increases our confidence that the ECB will lower policy rates in June,” Gerardo Martinez, Europe economist at BNP Paribas, told CNBC.

However, he also noted the slightly lower-than-expected fall in core inflation and volatility in some areas of services that had increased the inflation rates in France and Italy.

“With the path from here likely to be bumpy and growth data showing that the eurozone economy is gathering momentum, we think the path beyond June remains more uncertain and we continue to expect a gradual and cautious (quarterly) pace of easing from the ECB,” Martinez remarked.

Jane Foley, head of FX strategy at Rabobank, told CNBC that growth figures were encouraging, and that firmer than expected core inflation “may suggest less urgent need for more accommodative monetary policy from the ECB.”

“While a June rate cut is considered by many market participants to be almost a done deal, there is still plenty room for debate about the pace of ECB policy moves later in the year,” Foley added.

In 2022 and 2023, the European Central Bank increased interest rates at the fastest rate ever recorded in order to curb uncontrollably rising prices. However, since September, the ECB has maintained the 4% deposit rate, citing that it has taken all necessary steps to curb demand and eliminate price pressures.

Even so, some officials seem to be retracting their earlier remarks that a series of actions should follow the June cut because inflation was already well on its way to reaching the 2% target by the end of 2025.

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