Inflation in the euro zone eased in February, but not as much as expected, reinforcing expectations that the European Central Bank (ECB) will proceed with an interest rate cut today and continue easing monetary policy in the coming months.
Data from Eurostat released today shows that consumer price inflation across the 20 nations using the euro slowed to 2.4%, down from 2.5% in January. While slightly above the 2.3% forecast, the figure moves the euro zone closer to the ECB’s 2% target.
A key focus for policymakers, core inflation—which excludes volatile food and fuel prices—also slowed, dipping to 2.6% from 2.5%. Encouragingly, services inflation, which has been a major concern for over a year, has begun to decline, suggesting that pricing pressures may be easing.
Surprise Jump in Food Prices, But Rate Cuts Expected
Despite the general slowdown in inflation, unprocessed food prices saw an unexpected surge, with inflation in this category more than doubling to 3.1%.
The ECB has already implemented five rate cuts since June 2023, reacting to the rapid slowdown in inflation. With economic growth stagnating, the central bank is expected to continue easing its monetary policy, prioritizing economic stimulus over concerns about persistent price growth.
The euro zone economy has been largely stagnant for the past two years, with little sign of recovery. The industrial sector remains in recession, while rising trade tensions with the U.S. have discouraged corporate investment. Consumer spending, despite households holding strong financial buffers, has remained weak due to economic uncertainty surrounding trade, recession fears, and the war in Ukraine.
Given these conditions, the ECB is widely expected to cut its 2025 growth forecast for the fourth consecutive quarter today. The persistent economic downturn and repeated missed predictions of a consumption-driven recovery further support the case for more aggressive rate cuts.
Rate Cut Outlook for 2024
Despite the weak economic outlook, some ECB policymakers remain cautious about cutting rates too aggressively, fearing that services inflation could remain high and sustain broader price pressures. However, the latest data suggests this risk may be easing. Services inflation, which makes up the largest component of consumer prices, dropped to 3.7% from 3.9%, after lingering near 4% for most of the past year.
The ECB’s next meeting on Thursday is widely expected to result in a rate cut to 2.5%, a move that was anticipated even before the latest inflation data. Markets are currently pricing in two to three additional rate cuts this year, potentially bringing the ECB’s deposit rate down to 2% or even 1.75% by December—a level considered to be at the lower end of the so-called neutral rate, which neither stimulates nor restricts economic growth.
Further Cuts Possible Amid Economic Risks
While financial markets are predicting a gradual easing, some economists argue that risks favor an even lower rate. With inflation no longer a major concern, the ECB may be forced to cut more aggressively if economic headwinds worsen.
Key risks include a potential trade war with the U.S., weakening business confidence, and high energy costs, all of which could further drag down the euro zone’s fragile economy.