Eurozone January CPI unexpectedly heats up, supporting cautious interest rate cut expectations from the European Central Bank

Zhitong Finance learned that inflation in the Eurozone unexpectedly accelerated, supporting the European Central Bank's cautious interest rate cuts amid a stumbling economy facing increasing trade threats from the United States. Data released by Eurostat showed that the Eurozone's CPI in January rose by 2.5% year-on-year, higher than December's 2.4% and above economists' forecast of 2.4%. The core CPI in the Eurozone maintained a year-on-year growth rate of 2.7% in January, exceeding expectations, while closely watched service sector inflation saw a slight decline.

After the data was released, German government bonds continued to rise, with the yield on 10-year German bonds falling by 6 basis points to around 2.40%, a one-month low. The money market also maintained bets on significant interest rate cuts, with the market expecting the European Central Bank to cut rates three to four more times this year after last week's 25 basis point cut.

Data released by major European economies on Monday showed that inflation in Germany and France remained unchanged, while inflation in Italy and Spain accelerated. Although the European Central Bank is confident of achieving its 2% target this year, these data highlight that price pressures remain persistent. Bloomberg Economics, after considering the latest data, predicted that the Eurozone inflation rate would drop to 2.4% in February.

However, after the Eurozone's economic growth stagnated at the end of last year, the dangers facing the economy have become a focal point of concern. Last weekend, Trump initiated a global trade war, exacerbating the already high uncertainty. In addition to imposing tariffs on China, Mexico, and Canada, he reiterated warnings to the European Union that tariffs "will definitely happen."

French Central Bank Governor Francois Villeroy de Galhau described the U.S. actions as "very concerning," stating that the scope of these actions is "brutal." While urging Europe to remain calm, he indicated that the EU should go beyond defensive measures and consider how to promote growth. In an interview, he stated, "Protectionism may seem good at first because it can protect your economy. But experience shows that everyone is a loser, wherever and whenever."

Despite the European Central Bank's failure to implement the structural reforms many have called for, it has cut rates five times since June last year—most recently last week, when it lowered the deposit rate to 2.75%. It still considers monetary policy to be restrictive, indicating that further rate cuts are likely in the future.

Bloomberg's Chief European Economist Jamie Rush stated, "The overall situation in the Eurozone remains one of general anti-inflation. This will allow the European Central Bank to continue cutting rates this year, and we expect a total cut of 100 basis points." Slovak Central Bank Governor Peter Kazimir said on Monday: "Our approach is clear. Maintain stability, adjust when necessary, with a focus on keeping the economy on track."

Although unstable energy prices have slowed the recent decline in inflation, the growth rate of inflation in the service sector remains close to 4%, but it is expected that the rise in workers' wages will soon weaken. Regarding wages, European Central Bank President Christine Lagarde said last week, "All the indicators we currently have are pointing downward."

These all suggest that the European Central Bank will lower interest rates after next month's meeting. Lithuanian Central Bank Governor Gediminas Simkus told reporters: "I don't think the rate cut in March should be the last one, but the decision will depend on the data available at that time; in the future, we can allow ourselves to adopt a more accommodative policy."