Inflation falls in Germany and provides arguments for a quick interest rate cut | Pricing

Inflation in Germany surprised in March with a stronger decline than expected, giving, together with the indicators that show the difficulty of European industry in recovering, more strength to expectations that the European Central Bank (ECB) may soon start lowering interest rates.

At the end of the last meeting of the ECB’s board of governors, held on March 8, the president of the institution made a point of conveying the message that the economic data to be released in the following weeks would be crucial for the decision whether or not to cut key interest rates at the following meetings, one scheduled for April 11th and the other for June 6th.

“We clearly need more evidence, more data and we know that this data will arrive over the next few months. We will know a little more in April, but we will know a lot more in June”, said Christine Lagarde.

On the second day of April, the data that arrived seems to contribute to the ECB’s decision, at this month’s meeting or at the meeting in June, to remove interest rates from the record level they have been at since last month. of September.

This Tuesday, it became known that, in March, inflation in the largest economy in the euro zone registered a greater decline than what was expected by most economists. Germany’s harmonized annual inflation rate fell from 2.7% in February to 2.3% in March, remaining at its lowest level since June 2021.

In Portugal, the annual inflation rate rose in March from 2.1% to 2.3%, while the harmonized one, which uses the methodology agreed at European level, rose from 2.3% to 2.6%.

Given the weight that Germany assumes in the euro zone economy, the data now known makes it more likely that inflation in the euro zone (the first estimate of which will be released this Wednesday by Eurostat) also showed a downward trend in March, which, if confirmed, contradicts the average forecast of a maintenance of European annual inflation at 2.6% made recently by a group of analysts interviewed by the Reuters agency.

ECB officials have been divided over how quickly they should begin to moderate their fight against inflation by lowering interest rates. Those who fear that high interest rates could tip the economy into a recession argue that cuts should begin as soon as possible. Those who are still concerned about the persistence of inflationary pressures argue that it is necessary to wait and see how some economic data evolve, particularly those related to the evolution of wages.

At the moment, most forecasts point to the first cut in interest rates being made at the meeting on June 6th, but it cannot be ruled out that it will occur sooner or later.

The fall in the inflation rate in Germany known this Tuesday gives arguments to those who defend a faster interest rate cut, especially when this information is combined with that relating to the behavior of the PMI indicators of industrial activity in March in Germany and France , which, it was also revealed this Tuesday, remained below 50 points, pointing to the persistence of a contraction.

However, when looking in more detail at the German inflation figures, one also finds arguments that can be used by those responsible at the ECB in less of a hurry to lower interest rates. The decline in inflation in March in Germany was largely due to the favorable evolution of energy prices, something that is evident in the behavior evidenced by underlying inflation, which registered only a slight decline from 3.4% to 3.3% .

All these numbers – and others that will be announced in the coming days – will be at the center of the debate that the members of the ECB’s board of governors (including the governor of the Bank of Portugal, Mário Centeno) will have on the 11th in Frankfurt. This meeting could result in either a drop in the deposit interest rate from the 4% it currently stands at or, what is more likely, stronger signals from Christine Lagarde that the drop is to take place at the June meeting.