Europe’s Inflation Drops to 2.4%, Boosting Rate Cut Chances

In February, inflation within the eurozone decreased to an annual rate of 2.4%, highlighting the potential for another interest rate reduction from the European Central Bank (ECB). However, uncertainty remains regarding the extent to which the ECB might lower borrowing costs to stimulate an economy struggling to show significant growth.

Eurostat, the European Union’s statistical agency, reported that the inflation figure for February reflected a slight decrease from January’s 2.5%, driven mainly by reduced energy inflation, with France, a key economy in the region, experiencing a modest rate of just 0.9%. This decline in consumer price inflation supports the perspective that the ECB is making progress in reaching its 2% inflation target. Consequently, the focus may shift towards nurturing growth within the economy. The ECB’s rate-setting council is anticipated to cut the benchmark interest rate by a quarter point to 2.5% during its meeting on Thursday, a move that would potentially lower borrowing costs across the region, facilitating consumer activities like buying homes or expanding businesses.

Analysts had previously predicted a rate cut on Thursday, but the recent inflation figures bolster this expectation. Concerns about the eurozone’s economic growth have intensified, as data showed that the region stagnated in the last quarter of 2024. Consumer spending remained cautious following a period of inflation, while businesses are wary of potential U.S. tariffs under President Donald Trump’s administration. Additionally, political challenges in France due to a fragmented parliament, alongside Germany’s political transition following the national election on February 23, have created an atmosphere of uncertainty for businesses.

Surveys from S&P Global indicated that the eurozone economy barely managed to grow in February. As the ECB prepares for its interest rate meeting on Thursday, attention turns to whether President Christine Lagarde will hint at the potential scope of future rate cuts. Although inflation has notably declined from a peak of 10.6% in October 2022, certain indicators of price pressures, such as costs for services including haircuts, hotel accommodations, and medical services, remain elevated at 3.7%.

In its last meeting on January 30, the ECB noted that the benchmark rate was sufficiently high to constrain growth. Should this statement be omitted on Thursday, it may imply a more conservative approach toward further rate reductions. A leading ECB official recently cautioned that recent economic changes might limit the extent of possible rate cuts. Isabel Schnabel, a member of the six-member executive board overseeing the bank’s operations in Frankfurt, mentioned in a speech that the consistent downward risk to inflation has likely ended. Schnabel stated that the neutral interest rate, at which the economy is neither restrained nor overly stimulated, has increased in recent years.