FRANKFURT (Reuters) - Euro zone inflation accelerated slightly last month but remained on an anticipated course that could allow the European Central Bank to cut interest rates further, possibly as
Euro Zone Inflation Increases, March Rate Cut Still Expected
FRANKFURT (Reuters) -Euro zone inflation accelerated last month but remained on an anticipated course that could let the European Central Bank cut interest rates further, even if a surging dollar, a looming trade war and higher gas prices raise uncertainty.
The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB lowered borrowing costs for the fourth straight time last week and hinted at even more policy easing since inflation could be back at its 2% goal by late summer, economic growth is anaemic and a trade war was a distinct possibility.
Consumer price inflation in the 20 nations sharing the euro accelerated to 2.5% in January from 2.4% in December, just above expectations for 2.4% in a Reuters poll, as sharply higher energy costs added to price pressures.
But underlying inflation, a valuable indicator of the durability of price growth, held steady at 2.7% and services inflation eased. That was a modest relief to the ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB which has long argued that domestic price pressures are too high, even if all conditions are in place for some easing in those pressures given more muted wage growth.
For now, even the dollar's relentless rise may not have a big enough impact to shift expectations on borrowing costs.
The ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB earlier estimated that for every 1% euro depreciation, inflation rises by 0.04% in one year. However, on a trade weighted basis, the euro has fallen only by about 2% since the U.S. election last November, pointing to a small overall impact.
While quicker inflation is not welcome, the figures are in line with the narrative outlined by ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB President Christine Lagarde, who last week said that price growth could oscillate around these levels for the coming months before a slowdown towards the 2% target in the subsequent period.
Indeed, Lithuanian policymaker Gediminas Simkus said he expected a rate cut in March and even that is unlikely to be the last move. Slovakia's central bank chief Peter Kazimir, meanwhile has already appeared to shift his focus to the April meeting, arguing that for now, the ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB was not yet done.
That echoes both on- and off-the-record commentary from a host of policymakers suggesting that for now, another rate cut in March was the baseline.
The debate on a possible pause in policy easing may only heat up from April by when the deposit rate could be at 2.5%, the upper end of the estimate range for the 'neutral' level, a rate that neither restricts, not stimulates growth.
Economists were mixed on the fresh inflation print but were not ready to revise their rate outlook.
Nordea said that inflation could already be close to 2% next month but ING warned that upside risks surrounding inflation have far from abated.
"With inflationary risks still prevalent and uncertainty increasing, the question is how low the ECB-POLICY-SOURCES-e4bab80d-7aeb-4e49-a29a-ce14e1595c6d>ECB can push rates to give the economy more breathing room," ING's Bert Colijn said.
The biggest risk to such an outlook is whether U.S. President Donald Trump levies fresh tariffs on the European Union and how the bloc responds.
Tariffs slow economic growth since they reduce demand for European goods overseas, weighing on exports, a key driver of growth for decades. But retaliatory measures could push up domestic inflation by making goods imported from the U.S. more expensive.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
