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Eurozone inflation fell for the second month in a row to 2.2 per cent, strengthening the case for the ECB to cut interest rates this month.
Tuesday’s figure for March was below February’s reading of 2.3 per cent and in line with the expectations of economists polled by Reuters.
The annual inflation figure is still higher than the ECB’s medium-term target of 2 per cent. But rate-setters at the central bank believe that an increase in headline inflation since the autumn was temporary.
Annual services inflation — a closely watched metric that has concerned the ECB — fell from 3.7 per cent in February to 3.4 per cent, the lowest level in almost three years.
The ECB has previously signalled that it may slow the pace of its rate cuts because of the inflationary risks posed by the looming trade war sparked by US President Donald Trump, as well as increased spending on defence and infrastructure.
The central bank last month cut rates for the sixth time since last summer to 2.5 per cent. But it stressed that “monetary policy is becoming meaningfully less restrictive”, wording that suggested a more hawkish stance.
However, Riccardo Marcelli Fabiani, an analyst at Oxford Economics, wrote in a note to clients on Tuesday that March’s “favourable” inflation data “will lead the ECB to cut rates at this month’s meeting”.
After the data release, financial markets continued to price in a probability of roughly 75 per cent of another quarter-point cut at the April 17 meeting, according to levels implied by swaps markets.
Pooja Kumra, a rates strategist at TD Securities, said the services inflation number “argues for the April cut to still be in play”.
But she added that a trade war could change the picture, with “Trump-led inflation ticking up not only for US but also for Europe”.
The euro was flat after the publication of the data at $1.082 against the dollar.
Core inflation, which excludes highly volatile prices for food and energy, fell from 2.6 in February to 2.4 per cent, the lowest level since the start of 2022.
According to separate data released on Tuesday, the Eurozone unemployment rate fell to a record low of 6.1 per cent in February, down from 6.2 per cent a month earlier.
Melanie Debono, an economist at Pantheon Macroeconomics, said the figure indicated a “resilient labour market in the Eurozone”.
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