Eurozone Inflation Rises but March Rate Cut Still Likely

• Eurozone inflation accelerated last month but remained on an anticipated course that could let the European Central Bank (ECB) cut interest rates further, even if a surging dollar, a looming trade war and higher gas prices raise uncertainty.
• The ECB lowered borrowing costs for the fourth straight time last week and hinted at even more policy easing since inflation could be back at its 2.0% goal by late summer, economic growth is anaemic and a trade war was a distinct possibility.
• Consumer price inflation in the 20 nations sharing the euro accelerated to 2.5% in January from 2.4% in December, just above expectations for 2.4% in a Reuters poll, as sharply higher energy costs added to price pressures.
• However, underlying inflation, a valuable indicator of the durability of price growth, held steady at 2.7% and services inflation eased. That was a modest relief to the ECB which has long argued that domestic price pressures are too high, even if all conditions are in place for some easing in those pressures given more muted wage growth.
• While quicker inflation is not welcome, the figures are in line with the narrative outlined by ECB President Christine Lagarde, who last week said that price growth could oscillate around these levels for the coming months before a slowdown towards the 2% target in the subsequent period.
• Indeed, Lithuanian policymaker Gediminas Simkus said he expected a rate cut in March and even that is unlikely to be the last move. Slovakia's central bank chief Peter Kazimir, meanwhile, has already appeared to shift his focus to the April meeting, arguing that for now, the ECB was not yet done.
• The biggest risk to such an outlook is whether U.S. President Donald Trump levies fresh tariffs on the European Union and how the bloc responds. Tariffs slow economic growth since they reduce demand for European goods overseas, weighing on exports, a key driver of growth for decades. But retaliatory measures could push up domestic inflation by making goods imported from the U.S. more expensive.

(Source: Reuters)