Euro-Zone Inflation Holds Above Target as ECB Weighs Cuts

og{40hhttpmz3t8fftmegxdd_media_dl_1.png Eurostat

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(Bloomberg) — Euro-area inflation unexpectedly held steady and an underlying measure jumped in an awkward report for officials weighing how to respond to the economic hit from US tariffs. 

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Consumer prices rose 2.2% in April from a year ago, the same pace as in March, Eurostat said Friday. Economists had expected a slowdown to 2.1% in a Bloomberg survey. 

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Closely-watched services inflation accelerated, an expected effect of later Easter holidays that should reverse in May. The core number that strips out volatile components including food and energy came in at 2.7%, far more than analysts had predicted. 

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National reports this week showed slight decelerations in Germany and France, while Italian and Spanish inflation held steady. 

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The numbers may dampen some of the optimism that European Central Bank officials have lately displayed. President Christine Lagarde said last week that she and her colleagues are “nearing completion” in their task of bringing inflation back to 2%. 

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Policymakers have instead become more concerned about the economic damage from Donald Trump’s tariffs. While ECB Chief Economist Philip Lane doesn’t expect a recession, activity may recover more slowly than previously thought as companies hold off on investments and consumers postpone purchases.

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The impact of trade disruptions on euro-zone prices is more uncertain, but most policymakers now think they’ll mostly weigh on inflation. Slower growth, a stronger euro and falling energy costs are all expected to tame price pressures and lead to downward revisions in the ECB’s next round of economic projections in June. 

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Another factor is the potential diversion of Chinese goods that are now effectively shut out of US markets. Bloomberg Economics estimates that a large-scale rerouting of these products to other parts of the world could lower consumer prices in the European Union by 0.5%-1.5%.  

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Much still depends on how talks with the US develop during a 90-day window that Trump has allowed for negotiations. While the EU has so far held off on retaliation, any counter tariffs could push prices higher. 

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On balance, ECB officials have recently signaled they’re ready to add to the seven cuts to borrowing costs they’ve delivered since last June. But with rates now in a range where they’re estimated to no longer weigh on economic expansion, many have warned against easing too much unless the outlook darkens further. 

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After the inflation data, German bonds stayed lower and the euro held gains against the dollar. German two-year yields — among the most sensitive to monetary policy — were four basis points higher at 1.72% while the euro rose 0.4% to 1.1334 against the greenback.

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Money markets expect the ECB will deliver another two to three quarter-point cuts, according to swaps tied to policy-meeting dates.

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—With assistance from Joel Rinneby, Harumi Ichikura, Mark Evans and James Hirai.

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(Updates with market reaction in final two paragraphs)

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