"Green light" for interest rate cuts? Eurozone February CPI year-on-year at 2.4%, significant decline in service sector inflation

Wallstreetcn
2025.03.03 12:28
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Analysis suggests that although the overall inflation data is slightly higher than expected, the decline in service sector inflation has opened a "green light" for the European Central Bank to further cut interest rates. Since June of last year, the European Central Bank has cut rates five times in a row, and the market generally expects a further 25 basis point cut this week, paying attention to whether the European Central Bank will continue to describe its stance as "restrictive."

Inflation in the Eurozone cooled in February, with stubborn service sector inflation significantly retreating, paving the way for the European Central Bank to cut interest rates.

On Monday, the latest data released by Eurostat showed that the Eurozone's CPI rose 2.4% year-on-year in February, down from 2.5% in January, slightly above economists' expectations of 2.3%.

Notably, the service sector inflation rate, which has drawn significant attention from policymakers, fell to 3.7%, marking the first significant decline since April 2024. Core CPI (excluding food and energy prices) also decreased from 2.7% to 2.6%.

S&P Global Market Intelligence's European Economic Director Diego Iscaro stated:

The easing of service sector price inflation will be a relief for the ECB, and it is expected that weak economic growth will further drag down price pressures in the coming months.

However, influenced by slightly higher-than-expected data, the euro continued its upward trend, rising 0.82% to $1.0460. German bond yields rose further, with the 10-year yield increasing by 4 basis points to 2.45%.

A "Green Light" for ECB Rate Cuts

Although the overall inflation data was slightly higher than expected, the retreat in service sector inflation provides a "green light" for the ECB to cut rates further. Since June of last year, the ECB has cut rates five times in a row, and the market widely expects a further 25 basis point cut at this week's meeting in Frankfurt, bringing the deposit rate down to 2.5%.

However, there are divisions within the ECB regarding the pace of rate cuts. Hawks advocate for caution to avoid excessive rate cuts, while doves worry that weak economic growth could pull inflation below 2%.

Despite the positive inflation data, the Eurozone economy still faces multiple challenges. Weak economic growth, potential trade tariffs from the U.S., and geopolitical risks could all impact the Eurozone's economic and inflation outlook.

Additionally, as borrowing costs approach a neutral level that neither suppresses nor stimulates economic activity, the ECB needs to balance supporting economic growth with controlling inflation. Investors will closely watch whether the ECB will continue to describe its stance as "restrictive" this week or choose different wording, suggesting a possible pause in rate cuts in the coming months.

Bloomberg economists Jamie Rush and David Powell believe:

Weak growth and declining inflation will prompt the ECB to cut rates by 25 basis points in March and another 50 basis points later this year. However, they also note that as rates approach neutral levels, the baseline scenario is a pause in rate cuts in April, with the next action expected in June

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