Eurozone inflation falls less than expected: ECB rate cuts at risk?

Euronews

03-03-2025

After four consecutive months of rising inflation, eurozone consumer prices edged lower in February but fell less than economists had predicted, underscoring persistent price pressures that could complicate the ECB's rate-cut plans for 2025.
The eurozone's annual inflation rate eased to 2.4% in February 2025, down from 2.5% in January, according to flash estimates from Eurostat. However, this was higher than the forecasted 2.3%, highlighting the challenges of returning to the ECB's 2% target.
On a monthly basis, price pressures soared, with consumer prices rising 0.5% from January - the steepest increase since April 2024.
Services inflation remained the highest among categories, totalling 3.7% year-on-year, slightly down from January's 3.9%.
Food, alcohol, and tobacco inflation accelerated from 2.3% to 2.7%, while core inflation, which excludes energy and services, eased only slightly from 2.7% to 2.6%.
Among eurozone nations, Estonia recorded the highest annual inflation rate at 5%, followed by Croatia (4.7%) and Belgium (4.4%). On a monthly basis, Belgium stood out with a 2.4% surge, the steepest in a year.
ECB outlook: Rate cut path uncertain
The ECB is widely expected to cut rates by 25 basis points at its 6 March meeting, with Bank of America economist Ruben Segura-Cayuela describing it as the 'last easy cut'.
Yet, beyond March, divisions among ECB policymakers could emerge, making the pace of further easing uncertain.
BNP Paribas economist Stéphane Colliac noted that services inflation remains elevated across the eurozone, including in France.
He also warned that energy inflation could briefly tick up in the short-term, but this is unlikely to be sustained.
'From now until the summer, energy prices and those for food and industrial goods are likely to put upward pressure on inflation, but a fall in services inflation, even limited, would allow core Eurozone inflation to fall in the spring and headline inflation to stabilise at around the 2% target,' Colliac said.
BNP Paribas expects the ECB to deliver three consecutive quarter-point rate cuts, yet the bank warned that persistent core inflation close to 3% may slow the pace of future cuts.
Market reaction: Euro and defence stocks rally
The euro strengthened 0.6% to 1.0465 against the dollar by mid-morning Monday, extending session gains after the inflation data.
The single currency also found support from a weekend summit in London, where European leaders agreed on a coordinated plan to boost defence spending and sustain aid to Ukraine.
European bond yields rose as markets digested the combined impact of persistent inflation and increased government spending expectations. German two-year Schatz yields climbed 5 basis points to 2.05%, while 10-year Bund yields rose 6 basis points to 2.45%.
In equity markets, the Euro STOXX 50 index gained 0.6%, while Germany's DAX advanced 0.8%. Defence stocks led the rally, with Rheinmetall surging 17.6%, France's Dassault Aviation and Thales up 16%, and Italy's Leonardo rising 15% after European leaders pledged to boost military spending.
In Germany, reports suggested that the CDU/CSU and SPD, currently in coalition negotiations, are considering two special funds worth hundreds of billions of euros for defence and infrastructure investments. This added further momentum to defence stocks and bond yields.