ECB under pressure

According to data published by Eurostat, inflation in the eurozone came out at 2.6% year-on-year in February, a long way from the peak of 10.6% in October 2022. Four countries, including Italy and Finland, even saw consumer prices rise by less than 2%. Is inflation now under control in the eurozone? Not really, according to the European Central Bank, which shows that the slowdown in price rises is due above all to the fall in energy prices (-3.7%) and the slowdown in food prices (2.2%), while core inflation (excluding energy and food) remains well above the 2% target, at 3.1%. Furthermore, service prices are only slowing marginally to 3.9% (compared with 4% in January). Inflation is therefore likely to remain higher than anticipated, and the momentum of disinflation is likely to slow. According to the ECB, this situation is due to the momentum of wages, which are still rising by 5% at the end of 2023. However, the pressure on the ECB to lower its key rates is mounting, because the economic growth in Europe has been close to zero for over a year, and because Germany has been in a recession for several months. Given the need for confirmation of a fall in core inflation, there will be no cut in key rates in March or April. According to the Governor of the Banque de France, the ECB has to find “the right path between two risks: either cutting too soon with inflation starting to rise again or waiting too long and weighing excessively on activity”. In any case, this is not the view of the ECB’s “hawks” (including the Bundesbank), who believe that the biggest risk is cutting rates too soon.