Inflation in the euro zone eased – an important step for the ECB

A preliminary estimate of the March consumer price index in the euro area was slightly below economists' forecasts on a yearly and monthly basis.

According to the euro area's preliminary consumer price index, consumer prices rose 2.4 percent on a year-on-year basis in March, compared with the year-on-year change of 2.6 percent in February. A consensus forecast of economists compiled by Bloomberg expects an annualized change of 2.5 percent.

Eurozone consumer prices rose 0.8 percent from the previous month, while economists had expected a 0.9 percent change. In February, prices rose 0.6 percent on a monthly basis.

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In March, core inflation was estimated at 2.9 percent from a year earlier, while forecasts were for core inflation at 3.0 percent. In February, core inflation stood at 3.1 percent.

Core inflation refers to price developments that have been stripped of certain temporary factors, such as fluctuations in energy prices. Central banks monitor this number particularly closely.

OP: n Senior Market Economist Jari Hannikinen In his opinion, the European Central Bank is now one step closer to cutting interest rates.

“In particular, the slowdown in core inflation, i.e. inflation that strips out energy and food price fluctuations, was below 3 percent for the first time since February 2022 is welcomed by the ECB.”

According to Hännikäinen, inflation figures for March give the ECB a backbone to initiate interest rate cuts, although more evidence of cooling wage pressures is needed before the central bank changes its policy.

“We expect the ECB to keep its monetary policy line steady at next week's meeting, but give a stronger signal than before about the interest rate cut approach,” says Hännikäinen.

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“We see the ECB starting its interest rate cut cycle in June with an interest rate cut of 0.25 percentage points.”

The interest rate on the two-year German government bond rose 0.6 percentage points in less than ten minutes after the announcement of consumer price indices.

The yield on Germany's ten-year government bond was volatile and fell 0.7 percentage points during the review.

Addendum 3/4/2024 at 12:19: Added Hännikäinen's comments to the OP.

Consumer Price Indices

Consumer Price Inflation Indicates a widespread increase in the prices of goods and services. Consumer price inflation is measured by the Consumer Price Index.

Core inflation Certain temporary factors indicate removed price trends, for example, easily fluctuating energy prices.

As measures of core inflation Items are excluded or weighted indices are used based on statistical characteristics.

Central banks Monitor core inflation particularly closely, as it is not appropriate to react to short-term deviations from monetary policy aimed at price stability.

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