Eurozone inflation hit a four-month low at 2.2% in March, but rising monthly prices and persistent services inflation leave the ECB divided ahead of its April 17 meeting, with markets pricing a 65% chance of a rate cut.
Eurozone inflation cooled more than expected in March, sustaining market speculation that the European Central Bank (ECB) might continue cutting interest rates this month. Yet, despite the headline figure easing to a four-month low, several underlying and external dynamics may complicate the ECB’s decision at its April 17 meeting.
According to Eurostat’s preliminary estimate released Tuesday, consumer prices in the euro area rose 2.2% year-over-year in March, the lowest since November 2024 and just below the 2.3% consensus forecast.
Core inflation, which excludes volatile energy and food prices, fell to 2.4% from 2.6% in February, slightly below the expected 2.5%.
Behind the headline: Sticky core and monthly rebound
Still, not all signs point to a green light for monetary easing. While the annual pace of inflation decelerated, monthly figures revealed a different story. Headline inflation accelerated 0.6% from February, marking the sharpest month-on-month rise in nearly a year. Core inflation also jumped 0.8% from the previous month, the highest since March 2024.
Price pressures remain elevated in specific sectors. The cost of food, alcohol and tobacco increased by 2.9% annually, up from 2.7% in February.
Services inflation—a key metric the ECB closely monitors due to its correlation with wage growth and domestic demand—slowed to 3.4% on an annual basis, down from 3.7% in February. While this marked the lowest reading since June 2022, the monthly increase of 0.4% showed that underlying pressures remain far from subdued.
Geographically, inflation remained uneven across the currency bloc. France reported the lowest harmonised annual inflation at just 0.9%, while Estonia, Croatia and Slovakia each saw readings at 4.3%. On a monthly basis, consumer prices surged by 1.8% in Greece, 1.7% in Portugal, and 1.6% in Italy. Conversely, Belgium, Estonia and Luxembourg posted monthly price declines.
Markets lean toward a cut: But are policymakers ready?
As of Tuesday, money markets priced in a roughly 65% probability of a 25-basis-point cut at the April 17 meeting. But signs of division within the ECB Governing Council are growing.
Several officials are reportedly weighing whether to pause in April and wait for further clarity, particularly regarding the economic fallout from US trade policy and increased European military spending.
While rate cuts remain on the table, some members of the 26-person Governing Council are leaning toward a pause in April due to elevated uncertainty surrounding US trade policy and Europe’s defense spending surge.
The ECB’s deposit rate currently stands at 2.5%, down from a peak of 4%.
But the bank has signaled that further easing will depend on data confirmation, and some analysts say March figures send mixed messages.
Economists see the path to cuts, yet not without risks
Goldman Sachs’ chief European economist, Sven Jari Stehn, said core inflation is firmly on track to hit the ECB’s 2% target by year-end.
“Monetary policy still looks somewhat restrictive with the deposit rate at 2.5%,” he said.
According to Stehn, ECB’s President Christine Lagarde presented a more conservative economic impacts from tariffs than Goldman Sachs’ studies suggest.
ADVERTISEMENT“The euro area faces material downside risks from US tariffs, and the growth hit from a 25% across-the-board tariff could reach 1.4% of GDP.”
Bank of America economist Ruben Segura-Cayuela remains cautious but sees a trend of inflation undershoot.
“We’ve seen nothing in the monthly data or labour market that challenges our view,” he said, maintaining a terminal deposit rate forecast of 1.5% by September.
“Risks of a pause in April have risen. Communication will be noisy from here.”
ADVERTISEMENTABN Amro’s head of macro research, Bill Diviney, added that while the March rate cut was largely anticipated, April is less certain.
“The Governing Council has indicated rates are nearing neutral. Given fiscal support and potential trade shocks, June looks more optimal for the next move.”
According to the Dutch bank, the ECB needs more time to assess the impact of fiscal policy, trade risks and services inflation, which remains above target.
“Our base case is for the ECB to hold in April and resume cutting in June,” Diviney said.
ADVERTISEMENTOlli Rehn, member of the ECB Governing Council, said Tuesday that “if the data can verify the baseline, the right reaction in monetary policy should be to cut in April.”
Bottom line, the ECB’s April 17 decision is far from straightforward and will likely depend not only on the inflation trajectory, but also on external risks tied to looming tariff announcements and their potential economic fallout.