Eurozone inflation falls less than expected, fuelling ECB destination debate

Eurozone CPI inflation fell from 2.5% to 2.4% in February, beating forecasts for a drop to 2.3%.

Core inflation also fell less than expected, from 2.7% to 2.6%. Services inflation fell to 3.7%.

The euro has extended the day’s gains to 0.6% as markets pull back slightly on expectations for ECB cuts this year.

The headline for markets is that services inflation finally dipped away from the 4% mark for the first time in nearly a year.

That is still too high, of course, but I expect the downward trend to continue as the strong price growth from early 2024 drops out of the comparison and wage growth declines further.

That sets the ECB up to cut another three times this year to a terminal rate of 2.00%. Thursday is likely to be the last rate cut on autopilot, however, and debate about whether policy can still honestly be named ‘restrictive’ is going to ramp up rapidly. I look for a pause in April as the ECB begins to press on the brakes.