Inflation in the Eurozone decreased to 2.4% year-on-year in February, strengthening the argument for another interest rate cut by the European Central Bank (ECB). However, it remains unclear how much further the ECB will reduce borrowing costs for an economy still struggling with low growth.
The February inflation rate for the 20 countries using the euro fell from 2.5% in January, largely due to a decline in energy inflation. France, one of the region’s largest economies, saw a particularly low rate of just 0.9%, according to Eurostat, the EU’s statistical agency.
The reduction in inflation supports the view that the ECB is making progress in its efforts to bring inflation down to its target of 2%. It also opens the door for the ECB to focus on boosting economic growth, which remains sluggish. The ECB’s policy-setting council is expected to lower its key interest rate by a quarter point to 2.5% on Thursday. This rate influences borrowing costs across the economy, and the expected cut would make it cheaper to borrow money for purposes such as buying homes or expanding businesses.
Analysts had already anticipated a rate cut on Thursday, but the latest inflation data provides additional support for this decision.
Concerns about growth have intensified after the eurozone experienced stagnation in the final quarter of 2024. Consumers, still reeling from the effects of high inflation, have become more cautious with their spending. Businesses are also worried about potential new tariffs on exports to the U.S. under President Donald Trump. In addition, political instability in France, where no party holds a majority in parliament to address the country’s large budget deficit, and the transition to a new government in Germany following the February 23 national election, have left businesses uncertain about the future.
Recent surveys from S&P Global show that the eurozone economy saw minimal growth in February.
The key question at Thursday’s interest rate meeting is whether European Central Bank President Christine Lagarde will provide any guidance on how much further the bank plans to reduce rates. While inflation has significantly decreased from its peak of 10.6% in October 2022, some price pressures are still present. Notably, the cost of services—which includes a wide range of items from haircuts and hotel stays to concert tickets and medical care—remained steady at 3.7%.
At its previous meeting on January 30, the European Central Bank noted that the benchmark rate was still high enough to limit economic growth. If this reference is omitted on Thursday, it could indicate that future rate cuts will be more restrained.
A senior ECB official recently suggested that changes in the economy might limit how much further the bank can reduce rates. Isabel Schnabel, a member of the ECB’s six-member executive board, stated that recent evidence points to the end of a period where inflation risks were mainly on the downside. She also mentioned that the so-called neutral rate—the level at which the economy is neither constrained nor stimulated—has increased in recent years.