Inflation in the euro area eased to 2.4% in February, down from 2.5% in January, bringing it closer to the European Central Bank’s target of 2%. The slowdown in price growth strengthens expectations that the ECB may consider an interest rate cut later this year.
Inflation Trends and Key Drivers
The decline in inflation was driven by easing price pressures in energy and services, along with a notably low rate of 0.9% in France. Core inflation, which excludes food and energy prices, dropped slightly to 2.6% from 2.7% the previous month, suggesting a broader slowdown in price growth.
Inflation in the services sector, a key contributor to overall price levels, also declined to 3.7%, the lowest since April 2024. This marks a significant shift, as services inflation had been more persistent in recent months.
Impact on ECB Policy
With inflation moving closer to target, expectations for an interest rate cut by the ECB have grown. Many analysts anticipate a quarter-point rate cut, which would bring the benchmark rate down to 2.5%. The eurozone economy has struggled to gain momentum, and lower interest rates could provide much-needed support for growth.
Economic activity in the region has remained weak, with growth stagnating in late 2024. Surveys suggest that expansion in early 2025 remains limited, further supporting the argument for looser monetary policy.
Risks and Uncertainties
Despite the easing inflation, risks remain. Trade tensions with the United States could disrupt European exports, particularly if new tariffs are imposed on key goods. Political uncertainty in countries like France and Germany has also weighed on economic sentiment, adding to concerns about future stability.
Market Reaction and Outlook
Financial markets are anticipating at least two ECB rate cuts this year, with the first expected by mid-2025. However, policymakers remain cautious, emphasizing the need to monitor wage growth and inflation expectations before making a final decision.
As inflation continues to moderate and economic conditions remain uncertain, attention will turn to the ECB’s next policy meeting, where officials will weigh the risks and potential benefits of easing monetary policy.