Inflation in the eurozone rose unexpectedly to 2.5% in January, compared to 2.4% in December, according to figures from Eurostat. This increase can force the European Central Bank (ECB) to continue its cautious approach to interest rate letings. At the same time, the European economy is confronted with new trade threats from the United States.
ECB remains careful despite interest rate letings
The core inflation, which excludes volatile components such as energy and food, remained with 2.7% higher than expected. Although the price increases in the service sector decreased lightly, stubborn inflation indicators continue to challenge the ECB policy makers.
The figures follow earlier reports from the largest economies of the eurozone. In Germany and France, inflation remained stable, while Italy and Spain saw an acceleration. This emphasizes that, despite the expectation that inflation this year will fall towards the 2%objective of the ECB, price pressures in some countries last longer.
Despite this increase, German government bonds held their profit. The interest on the 10-year bonds fell by six basic points to 2.40%, the lowest level in a month. Investors still expect three to four interest rates this year, despite the recent interest rate reduction to 2.75%.
Trump threatens with trade war against Europe
In addition to inflation pressure, the European economy is also threatened by the US protectionist trading policy. President Donald Trump announced this weekend that import tariffs for the EU will “definitively come”, in addition to the rates for China, Mexico and Canada already announced.
The governor of the Banque de France, François Villeroy de Galhau, called the American trading policy “very worrying” and described it as a “brutal measure”. He called for calmness, but also stated that Europe should look beyond defensive measures and have to think about strategies to stimulate economic growth.
“Protectionism initially seems beneficial because it protects your economy,” he told France Info Radio. “But experience shows that in the end everyone loses.”
ECB continues interest rates, but with caution
Despite increasing inflation, the wider trend in the eurozone continues to indicate disinflation, according to an analysis by Bloomberg Economics. This would give the ECB the space to continue this year with interest rates, possibly with 100 basic points of relaxation.
Yet the ECB remains careful. Board member Peter Kazimir emphasized that the Central Bank will not change its approach abruptly. “We remain stable, adjust us where necessary, and focus on keeping the economy on course,” he said.
ECB president Christine Lagarde indicated last week that wages in the eurozone show signs of cooling. This supports the expectation that the inflation pressure will eventually decrease, which will keep the door open for further interest rate letings.
Yet the uncertainty remains great. Gediminas Simkus, head of the Lithuanian Central Bank, emphasized that the ECB may have to implement more than one interest rate reduction to support the economy. “I don’t think the interest rate reduction should be the last in March, but we will remain dependent on the data,” he said.
With a stagnant economy, rising inflation and new trading threats from the US, the ECB balances between economic growth and guaranteeing price stability. In the coming months will be crucial for the interest rate policy in the eurozone.
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Source: https://newsbit.nl/inflatie-in-eurozone-stijgt-onverwacht-ecb-blijft-voorzichtig-met-renteverlagingen/
