March inflation data does not put ECB under pressure – April meeting on hold

In March 2024, inflation in the euro area rose slightly slower than expected. The cost of living increased by 2.4 percent, down from 2.6 percent in February. All in all, two things are remarkable: Firstly, food prices are rising much more slowly. They increased by only 2.7 percent in March (February: 3.9 percent). Second, the core rate fell below the 3 percent mark for the first time since February 2022. In March, it stood at 2.9 percent (February: 3.1 percent). However, it was consumer durables that took the core rate down as service prices rose by 4.0 percent for the sixth consecutive month in a row. This may remain a concern by the European Central Bank (ECB) as service prices are strongly driven by wage growth.

Today's inflation data for the Euro area do not suggest any changes in the ECB’s policy in April 2024. In various statements, ECB officials have repeatedly made it clear that they need more data to evaluate the underlying inflation trend. This is likely to remain the key message of ECB President Lagarde in April, as key wage data will only be due for release in the coming weeks. Therefore, the key interest rate of 4 percent is likely to be reaffirmed in April, but with the prospect of a first rate cut in June, as we have long expected. This raises the question of the pace of the trend in interest rate cuts. Although wage growth is likely to have peaked, uncertainty remains high as to whether wage growth momentum will sufficiently moderate to reach the 2 percent inflation target. Therefore, we expect ECB President Lagarde to stick to data dependency and gradual rate cuts.

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