Euro-area inflation unexpectedly accelerated, supporting the European Central Bank’s cautious approach to lowering interest rates while the sputtering economy faces intensifying trade threats from the US.
Consumer prices advanced 2.5 per cent from a year ago in January, up from 2.4 per cent in December and more than the stable reading predicted by economists, Eurostat said.
Core inflation, which strips out volatile components, stayed higher than anticipated at 2.7 per cent, while price gains in the closely-watched services sector dipped a touch.
German bonds held on to gains, leaving the 10-year yield six basis points lower at a one-month low around 2.40 per cent. Money markets also maintained wagers on aggressive rate cuts, pricing between three and four more this year following last week’s quarter-point reduction.
Monday’s data follow reports from Europe’s top economies showing unchanged inflation in Germany and France, and accelerations in Italy and Spain.
The numbers highlight that lingering price pressures remain, despite confidence at the ECB that the 2 per cent target will be met this year. But it’s dangers to the economy that are taking centre stage after growth in the 20-nation bloc flatlined at the end of last year.
Adding to already elevated uncertainty this weekend were the first concrete signs that President Donald Trump is about to start a major global trade war. On top of levies for China, Mexico and Canada, he reiterated a warning to the European Union that tariffs “will definitely happen.”
Bank of France Governor Francois Villeroy de Galhau called the US moves “very worrying,” describing the scope of the action as “brutal.” While urging Europe to stay calm, he said the EU should look beyond defensive measures by also considering how to boost growth.
“Protectionism can seem nice at the start because it protects your economy,” he told France Info radio. “But experience has always and everywhere shown that everyone loses.”
While not able to deliver the structural change many are calling for in Europe, the ECB has cut rates five times since last June – most recently last week, when it brought the deposit rate to 2.75 per cent. It still deems monetary policy restrictive, implying further reductions in the pipeline.
“Our approach is clear,” Governing Council member Peter Kazimir said on Monday. “Stay steady, adapt when necessary, and focus on keeping the economy on track.”
While volatile energy costs have slowed the recent retreat in inflation and increases in services are still almost 4 per cent, the expectation is that rises in workers’ pay will soon abate. On wages, “all the indicators that we have at the moment are heading downward,” President Christine Lagarde said last week.
That all points to rate reductions beyond next month’s meeting.
“I don’t think the March cut should be the last one but decisions will depend on data available at the time,” Lithuanian central-bank chief Gediminas Simkus told reporters in Vilnius. “Going forward, we can allow ourselves a looser policy.” – Bloomberg
