Euro-area inflation is projected to fall below the European Central Bank's (ECB) target sooner than expected, with average rates anticipated to be at 1.9% in the first quarter of 2025. This prediction comes ahead of the ECB's own forecast, signaling a potential easing of price pressures in the region. However, the core inflation rate, which excludes volatile items such as food and energy, is expected to remain slightly above target, hovering around 2.1% and 2.3% for the first and second quarters of 2025 respectively.
This updated outlook follows an unexpected slowdown in inflation last month to 2.9%, prompting ECB officials to prepare for a challenging journey towards price stability. The path ahead is complicated by the gradual withdrawal of government subsidies and the prospect of rising wages. Despite these pressures, the ECB has maintained interest rates steady since initiating a tightening campaign in mid-2022.
Economists are now eyeing a potential interest rate cut as early as June 2024. Yannis Stournaras, the Greek central bank governor, has hinted at the possibility of lower borrowing costs starting from the middle of next year. Nevertheless, some consider discussions on rate cuts to be premature at this stage.
Adding to the complexity is the ongoing Israel-Hamas conflict, which introduces further uncertainty into the economic outlook. Despite fears that this could affect energy prices and consequently inflation, any impacts have thus far been successfully contained. The situation continues to be closely monitored by ECB officials and market analysts alike as they navigate towards achieving and maintaining price stability in an environment full of both domestic and international economic variables.
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