FRANKFURT (Reuters) – Euro zone inflation prospects improved while growth remained anaemic, fresh data showed on Friday, solidifying the case for further ECB rate cuts to stimulate an economy that has been stagnant for nearly two years.
Borrowing costs have already tumbled but the 20-nation currency bloc is stuck in low gear as manufacturing is in recession, consumers are unwilling to spend and firms, worried about a full-scale trade war with the U.S., are holding back investment.
Although the ECB has been easing quickly, some policymakers have been pleading for increased caution over further moves, still worried that price pressures are lingering in the domestic economy and the bank could undo years of hard work.
Those fears likely eased on Friday when data showed price growth slowing in some of the bloc’s largest economies while expectations also eased, seemingly confirming long-held views that February could prove a turning point.
Inflation in France, the euro zone’s second biggest economy, tumbled far more than expected to a four-year low of 0.9% in February from 1.8% in January while figures from some key German states also showed a slowdown.
More importantly, services inflation dropped to 2.1% from 2.5% in France, a crucial shift as services, the largest item in the consumer price basket, had been flatlined for months, boosting fears that disinflation could derail.
Euro zone consumers, who were nudging up their own price growth bets in the closing months of 2024, also became more optimistic, lowering their expectation for the next 12 months to 2.6% in January from 2.8%, a separate ECB survey showed.
The figures combined appear to confirm the ECB’s own narrative that price growth is about to turn a corner and would now start heading towards its 2% target, even as borrowing costs are already down.
The ECB has cut rates five times since last June and a sixth move on Thursday is seen as largely a done deal with the debate already focusing on how much more the ECB would have to do in subsequent months.
Investors now anticipate between two and three cuts after the March 7 move, with bets oscillating mostly in response to news out of Washington on trade policy.
Uncertainty over trade has been weighing on the euro zone for months and fresh data suggest no turnaround.
The French economy contracted last quarter, updated figures showed on Friday, while German retail sales barely grew, adding to a recent run of indicators and surveys pointing to a stagnant economy.
Even the ECB’s own survey painted a bleak picture with consumers betting on economic contraction and shrinking real incomes.
But there were also some signs suggesting that the bloc may have bottomed out and prospects were not getting worse.
German unemployment rose by only the smallest increment and far less than expected, while French consumer spending also contracted by less than forecast.
The ECB’s own survey also showed a modest improvement in job prospects and a slight uptick in consumer spending expectations.
(Reporting by Balazs Koranyi; Editing by Peter Graff)
