The Euro zone’s inflation rate accelerated to 2.5% in January, driven largely by higher energy costs. However, this surge is expected to be short-lived, with the European Central Bank (ECB) still on track for a rate cut later this year.
According to data released on February 3, the ECB’s consumer price index rose above expectations as sharply higher energy costs added to price pressures. The underlying inflation rate, which measures the durability of price growth, held steady at 2.7%.
While the dollar’s recent rise is expected to have a muted impact on interest rates, policymakers remain divided on when and how much further the ECB will cut borrowing costs. Lithuanian policymaker Gediminas Simkus predicted a rate cut in March, while Slovakia’s central bank chief Peter Kazimir has shifted his focus to the April meeting.
The biggest risk to this outlook is the potential for US tariffs on European goods, which could slow economic growth and push up domestic inflation. Economists are divided on how low the ECB can go with interest rates, with some warning that uncertainty remains high and further policy easing may be limited.
In a statement, ING economist Bert Colijn said: “With inflationary risks still prevalent and uncertainty increasing, the question is how low the ECB can push rates to give the economy more breathing room.”
Source: https://www.reuters.com/markets/europe/euro-zone-inflation-accelerates-january-energy-2025-02-03