German inflation slows further as ECB readies June rate cut
GERMAN inflation eased for a third month in March, supporting expectations that the European Central Bank will start lowering interest rates in June.
Consumer prices rose an annual 2.3 per cent last month, according to the statistics office – down from 2.7 per cent in February and less than the 2.4 per cent median estimate in a Bloomberg poll of economists. Food costs were a key driver of the slowdown.
The data come after France also reported a slowdown on Friday (Mar 29). At the same time, price gains accelerated in Italy and Spain – in line with warnings from policymakers that the path down to the 2 per cent target will not be smooth.
As governments across the region withdraw aid measures introduced when energy costs soared, inflation is being jolted by one-off effects. That’s also the case in Germany, where tax changes and a cheap transport ticket introduced in 2023 will exert upward pressure, according to Deutsche Bank economist Sebastian Becker.
But the overall picture is still that of a broad weakening, allowing the ECB to prepare investors for a first reduction in borrowing costs in June. Eurozone data, due on Wednesday, are expected to show a dip to 2.5 per cent.
In Germany, fewer companies are planning to raise their prices, particularly in consumer-related industries, the Ifo institute said on Tuesday. An index of such expectations fell to the lowest level in three years in March.
A lingering concern is labour-market resilience and the resulting large gains in wages that could keep underlying inflation elevated for longer. Confirmation of a moderation in pay increases will only arrive slowly, prompting most officials to exclude a rate cut at next week’s policy meeting.
ECB Executive Board member Piero Cipollone warned last week against putting too much emphasis on salaries, saying the eurozone’s fragile economy needs workers’ pay to catch up with prices in order to sustain the kind of recovery that’s hoped will gradually take hold.
What happens after monetary easing begins is unclear. Several officials have stressed the need to remain data-dependant and judge developments on a meeting-by-meeting basis, even as others appear to back more rapid loosening. BLOOMBERG
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