Eurozone core inflation falls, opening door to smaller ECB interest rate hike

Inflation is receding faster than expected in Europe, raising the prospect of the bloc’s central bank slowing the pace of its interest rates hike this week, new figures out today reveal.

The rate of underlying price increases – known as core inflation – in the group of 20 countries using the euro thinned to 5.6 per cent last month, down from 5.7 per cent, according to eurostat.

The reading was slightly below market expectations.

Headline inflation edged higher to seven per cent, up from 6.9 per cent, although economists have tended to focus on core inflation, which strips out food and energy price changes, to yield clues on whether cost pressures are easing in Europe.

European Central Bank (ECB) officials have been trying to bring down inflation in the continent for around a year by raising interest rates at the most aggressive pace since the monetary authority was created at the turn of the millennium.

Russia’s invasion of Ukraine has roiled European energy markets, pumping up inflation.

Borrowing costs across the bloc have shifted from being negative for several years to three per cent after several outsized hikes from the ECB of at least 50 basis points.

Those moves seem to be tackling prices, with inflation dropping from a peak of 10.6 per cent in October. The rate of price rises is tipped to drop quickly throughout this year. 

Last month’s fall also leaves the UK further ahead in the inflation league table, with the rate of price increases at 10.1 per cent, although the Office for National Statistics has yet to publish estimates for April’s rate, which is expected to fall to around nine per cent.

Markets interpreted eurostat’s numbers as a signal ECB President Christine Lagarde and the rest of the governing council – in charge of setting official interest rates in the eurozone – will climb down from raising rates at a 50 basis point pace to 25 basis points when they announce their next decision on Thursday.

“25 basis points is now the clear consensus, which we think the ECB will embrace given increasingly ill tidings from leading economic indicators, and evidence that core inflation is no longer rising,” Claus Vistesen, chief eurozone economist at consultancy Pantheon Macroeconomics, said.

Other numbers out today showed European lenders reined in credit at the quickest pace since the sovereign debt crisis in the early 2010s, suggesting economic activity could slim in the coming months.

“The underlying trend is down. Inflation in food, alcohol and tobacco slipped to 13.6 per cent, from 15.5 per cent in March, the first sign of easing in this component since the increase began 12 months ago,” Vistesen added.

Analysts reckon European rates to peak anywhere between 3.5 and four per cent.

But some questioned whether today’s eurozone data will be enough to convince Lagarde and co to roll back their inflation fight.

“Services inflation, which is of more concern, edged up from 5.1 per cent to 5.2 per cent. With the labour market still remarkably tight and demand for labour having increased further in April, policymakers will worry that services inflation will be difficult to contain,” Andrew Kenningham chief Europe economist at Capital Economist.

Kenningham thinks the ECB will opt for a 50 point increase, taking rates to 3.5 per cent.

US Federal Reserve officials are expected to bump rates 25 basis points higher tomorrow.