Euro zone inflation holds steady, paving way for ECB rate cuts

On May 1, 2025, the euro zone's inflation rate was reported at 2.2% for April, according to flash data released by the statistics agency Eurostat. This figure came in above the expectations of economists polled by Reuters, who had forecasted a drop to 2.1%. The inflation rate has been slowly easing, trending towards the European Central Bank's (ECB) target of 2%. However, core inflation, excluding volatile categories such as food and energy, rose to 2.7%, indicating some underlying inflationary pressures. Additionally, inflation in the services sector increased to 3.9%, reflecting changes partly attributed to seasonal factors surrounding the Easter holiday. The euro strengthened against both the U.S. dollar and the British pound following this data release. In contrast, bond yields remained stable, with 10-year German bonds trading just above 3 basis points higher. Franziska Palmas, a senior economist at Capital Economics, noted that the increase in services inflation might be temporary and could reverse in the coming months. This perspective leaves the door open for the ECB to potentially lower interest rates further. Michael Field, chief equity strategist at Morningstar, urged caution regarding tariff uncertainties impacting European inflation in the future. Field emphasized that escalating tariff tensions could lead to a rise in inflation. Furthermore, the current inflation scenario allows the ECB more flexibility to make interest rate cuts, alleviating pressure from elevated headline inflation levels. Christine Lagarde, President of the ECB, remarked in a recent CNBC interview that the inflation target could be reached in 2025, indicating a positive trend in a disinflationary process. However, she also warned policymakers must tread carefully, as the medium-term outlook for inflation remains unpredictable due to varying influences, including potential retaliation from Europe in response to U.S. tariffs and Germany's substantial infrastructure investments. Lagarde has echoed that the ECB's future decisions on interest rates will be highly data-dependent. The ECB's latest interest rate reduction brought the key rate down to 2.25%, a significant decrease from the highs of 4% recorded in mid-2023. The ongoing analysis and decision-making processes by the ECB are critical as they navigate an evolving economic landscape characterized by inflation pressures and international trade dynamics.