German Inflation At 4-Month Low Adds To ECB Rate Cut Hopes

(RTTNews) - Consumer price inflation in Germany slowed in March to its lowest level in four months as services cost growth eased further and energy prices fell at a steeper rate, boosting hopes that the European Central Bank will continue cutting interest rates this month.

The consumer price index rose 2.2 percent year-on-year following a 2.3 percent increase in each of the previous two months, preliminary data from Destatis showed on Monday. Inflation was the lowest since November when it was at the same level.

Core inflation, which excludes food and energy, eased to 2.5 percent from 2.7 percent. Among the main components, services inflation, that had been sticky for a long time, slowed sharply to 3.4 percent from 3.8 percent. Food price growth rose to 2.9 percent from 2.4 percent. Energy prices decreased 2.8 percent after a 1.6 percent fall in the previous months.

The CPI rose 0.3 percent from the previous month after a 0.4 percent increase in February.

Both changes in the CPI were in line with economists' expectations.

The harmonized index of consumer prices rose 2.3 percent year-on-year following a 2.6 percent rise in the previous month. Economists had expected the EU measure of inflation to ease to 2.4 percent. The HICP rose 0.4 percent from February when it had climbed 0.5 percent. The monthly rate was expected to remain unchanged at 0.5 percent.

ING expects headline inflation to remain volatile but to broadly remain within the range of 2 percent and 2.5 percent.

"…despite potential fears of longer-term inflationary risks as a result of fiscal stimulus, the potentially accelerating disinflationary trends in the near term could motivate the ECB to bring policy rates deeper into neutral territory," ING economist Carsten Brzeski said.

In March, the ECB cut interest rates for a fifth policy session in a row and lowered the deposit rate by 25 basis points to 2.5 percent, which is its lowest level since February 2023. The bank had signaled a pause in the easing cycle as policy was deemed less restrictive.

Commerzbank economist Ralph Solveen said the developments in services inflation was hardly attributable to wage growth that continued to increase over the course of last year. "Rather, it seems that companies are finding it increasingly difficult to pass these higher costs on to their customers in light of the persistently weak economy," the economist said.

The bank staff raised headline inflation forecast for this year citing strong energy prices but lowered the projection for core inflation.

Commerzbank expects Eurozone inflation to come in at 2.2 percent in March, which is just above the 2 percent target.

"At its meeting in mid-April, the doves on the ECB Governing Council will use this as an argument to cut the key interest rate again by 25 basis points," Solveen said.

"Another step is likely to follow after the June meeting, before the ECB will probably switch to a "wait-and-see" mode."

Capital Economics economist Franziska Palmas also gave similar assessment. Germany's figures, together with those from France, Italy and Spain, suggest that euro-zone headline inflation will probably come in at 2.2 percent in March, a bit below expectations, the economist said.

"The slowdown in services inflation increases the likelihood that the ECB cuts rates again in April, in line with our forecast, rather than pausing," Palmas said.