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Latest euro zone inflation figures suggest ECB will move slowly on rates

Frankfurt is still expecting to start cutting rate this year but the moves may be small and slow

Christine Lagarde, president of the European Central Bank, at a rates decision news conference in Frankfurt, Germany, in December. Photographer: Alex Kraus/Bloomberg

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Cantillon
Thu May 2 2024 - 06:15

The euro zone’s latest inflation numbers, published this week, were slightly stickier than expected with headline price growth stuck at 2.4 per cent for April and core inflation (at 2.7 per cent) coming down more slowly than analysts had forecast.

The headline figure was flat because food inflation accelerated from 2.6 to 2.8 per cent, while energy prices dropped more slowly than expected from -1.8 to -0.6 per cent compared to April last year.

While the outlook for prices is still positive in that the euro zone remains on a disinflationary path, the latest tranche of numbers serves as a warning that the European Central Bank (ECB), when it finally starts reducing interest rates, is likely to move slowly and will – according to Dutch bank ING – “take its time in normalising rates”.

Ironically stronger-than-expected growth numbers for the EU represent an upside risk for inflation. With real wages rising and labour markets still strong, Frankfurt policymakers will, however, feel they have time on their side.

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The more cautious outlook on rates was reflected in Bank of Ireland’s latest trading update. The lender said it now expects its full-year net interest income to decline by only 3-4 per cent compared to its previous forecast for a 5-6 per cent drop.

The bank had previously assumed the ECB would cut its key deposit rate from 4 per cent to 2.75 per cent by the end of the year. It now expects rates across the euro zone, UK and US to be a quarter of a percentage point higher than previously expected at the end of the year.

The ECB’s expected pivot in monetary policy in June is still on the cards but mortgage holders won’t have much to celebrate.

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