Euro zone inflation falling quicker than thought, data show

Euro zone inflation falling quicker than thought, data show

By Balazs Koranyi

(Reuters) -Euro zone inflation could fall faster than expected this year as economic growth will remain anaemic, a raft of surveys and indicators showed on Friday, bolstering bets for an early start to European Central Bank interest rate cuts.

The ECB kept interest rates unchanged on Thursday and insisted that even a discussion about rate cuts was premature because prices pressures have yet to be fully extinguished.

But fresh figures show inflation is cooling quickly, growth is anaemic and lending growth is at best bottoming out after an exceptionally weak 2023.

A key ECB survey now sees inflation at 2.4% this year, down from 2.7% seen three months ago and well below the 2.7% projected by ECB staff.

In 2025, price growth could then average 2.0%, spot on the ECB’s target, the Survey of Professional Forecasters, a key input in the bank’s policy deliberations, showed.

“The further we go into 2024, the greater the chance of a rate cut,” ECB Governing Council member Gediminas Simkus said.

“The increase in the odds is exponential, not linear,” Simkus said, calling a 2024 rate cut a near certainty but, even if March was not the appropriate date to start.

This downgrade in the inflation outlook was consistent with the findings of a separate survey of the ECB’s contacts with corporations and matches views held by many market economists.

“Contacts reported that growth in selling prices remained moderate in the fourth quarter of 2023, with some further easing expected in the short term,” the ECB said.

Many economists argue that the ECB is overly pessimistic about inflation as weak growth, moderating commodity prices, lower than feared wage growth and the impact of past rate hikes are all pointing to price growth falling back to the ECB’s 2% target sooner than its 2025 projection.

Indeed, the forecasters’ survey sees anaemic economic growth this year and GDP is seen expanding by 0.6% in 2024, less than the 0.9% seen in the previous forecast. In 2025, they see growth at 1.3%, down from 1.5%.

Fresh lending figures were also consistent with the overall picture of low growth fuelling disinflation.

Lending to corporations expanded by just 0.4% in December while household lending growth slowed to 0.3% from 0.5%.

Though these figures point to weak activity, the corporate figures included a silver lining in that the monthly lending volume was the highest in over a year.

Still, the corporate survey pointed to continued economic stagnation.

“Contacts painted a largely unchanged picture of activity stagnating or contracting slightly in the fourth quarter of 2023, with little or no pick-up expected in the first quarter of 2024,” the ECB said.

Firms said they expected the jobs market to soften given prolonged uncertainty and an increasing need to contain costs.

Over the longer term, defined as 2028, the forecasters’ survey sees price growth at 2.0%, down from a previous forecast at 2.1%.

(Reporting by Balazs Koranyi; Additional reporting by Andrius Sytas; Editing by Toby Chopra)