Price rises in the euro area remained steady at 2.4% in April, in line with economists’ forecasts. Monthly inflation was 0.6%, while core inflation, excluding energy, food, alcohol, and tobacco, decreased to 2.7% from 2.9% in March. The impact of lower energy prices moderated, with a year-on-year change of -0.6% compared to -1.8% in March. Gross domestic product (GDP) grew by 0.3% in the first quarter, slightly beating expectations. However, GDP for the fourth quarter of 2023 was revised from no growth to a 0.1% contraction, indicating that the euro zone was in a technical recession in the second half of last year.
Market expectations are rising for the European Central Bank to begin cutting interest rates at its upcoming monetary policy meeting on June 6. Money market pricing suggests a nearly 70% likelihood of a rate cut in June, with even higher expectations for cuts in July or September. Several ECB members have indicated they are anticipating a rate reduction in June to prevent a slowdown in the euro zone economy, citing risks from oil prices and Middle East volatility. Analysts at BNP Paribas had anticipated stable headline inflation due to higher crude oil prices, which they believed would support a rate cut in June. They noted uncertainty regarding rate outlook beyond June.
The possibility of interest rate cuts has been influenced by the moderate inflation and economic growth figures in the euro area. While headline inflation remains stable, core inflation has decreased slightly, and GDP growth in the first quarter was stronger than expected. The revision of GDP data for the fourth quarter of 2023 to show a contraction also highlights the challenges faced by the euro zone economy in recent months. Market expectations and statements from ECB members suggest that a rate cut in June is likely to address economic concerns and potential risks.
The decision to cut interest rates is seen as a preemptive measure to support the euro zone economy and prevent further economic slowdown. The impact of oil prices and geopolitical instability in the Middle East are among the factors contributing to the need for monetary policy action. Analysts believe that a rate cut in June would be supported by stable inflation and GDP growth, as well as the revised GDP figures for the previous quarter. The uncertainty regarding future rate decisions reflects the complex economic environment in the euro area and the need for continued monitoring of key economic indicators.
Overall, the euro area’s economic performance in the first quarter, with steady inflation and modest GDP growth, has prompted expectations of interest rate cuts by the ECB. Market pricing suggests a high likelihood of a rate cut in June, with potential cuts in subsequent months. ECB members and analysts have highlighted the need for monetary policy action to address economic challenges and risks. The upcoming monetary policy meeting on June 6 will be closely watched for any announcements regarding interest rate changes and the ECB’s outlook on the euro zone economy.
