Lower inflation removes last doubts about ECB interest rate cuts

European inflation and core inflation fell more than expected in March. This makes an interest rate cut by the European Central Bank seem certain in June.

Inflation in the eurozone fell more than expected in March. It fell to 2.4 percent, compared to 2.6 percent in February. Economists had predicted 2.5 percent inflation.

Core inflation, without food and energy, is also slowing. That measure of underlying inflation fell to 2.9 percent, down from 3.1 percent in February. Economists had forecast 3 percent core inflation.

The decline in inflation is mainly due to slower price increases for food and industrial goods. Energy prices continue to fall, but at a slower pace. Services inflation is persistent, standing at 4 percent for the fifth month in a row. This is mainly due to the strong increase in wages.

But investment bank Nomura notes that the high services inflation in March may be due to an Easter effect. Easter fell in March this year and April last year. As a result, package holidays and plane tickets were more expensive than normal in March.

The clear slowdown in inflation suggests that the European Central Bank (ECB) will succeed in achieving its 2 percent inflation target in 2025. As a result, the last doubts about an interest rate cut in June have disappeared. According to the money market, it is 100 percent certain that the ECB will cut interest rates for the first time in two months.

Some ECB directors, including French director François Villeroy de Galhau, recently signaled that the ECB should consider an interest rate cut as early as next week. But according to the money market and economists, there is little chance that the central bank will then relax its monetary policy.

ECB President Christine Lagarde said after the previous meeting, in March, that the ECB will not have sufficient new figures on current and expected wage developments to cut interest rates until June. Frankfurt assumes that wage increases and services inflation will slow down, but it wants more certainty about this first.

The money market expects the ECB to cut interest rates two or three more times in the second half of the year. That would reduce the deposit rate to 3 or 3.25 percent by the end of this year, compared to 4 percent now.