Eurozone Inflation Drops to 2.2% in March Amid Looming U.S. Tariffs

Annual inflation in the Eurozone decreased slightly to 2.2% in March, according to preliminary data released on Tuesday by Eurostat, the European Union’s statistical agency. The figure represents a marginal decline from February's 2.3%, reflecting easing price pressures across the region.

Core inflation, which excludes more volatile items such as food, energy, alcohol, and tobacco, also showed signs of cooling, moving down to 2.4% from 2.6% in February. Inflation in the services sector, closely monitored by policymakers due to its previous stability around 4%, dipped notably to 3.4% from the prior month’s 3.7%.

Major Eurozone economies contributed to this downward trend. Germany saw inflation ease to 2.3%, Spain reported a reduction to 2.2%, while inflation in France remained stable at 0.9%.

ECB Likely to Lower Interest Rates

Following the release of the new inflation data, market expectations strengthened for a 25-basis-point interest rate cut by the European Central Bank (ECB) at its upcoming policy meeting scheduled for April 17. According to recent market data, there is approximately an 80% chance of such a reduction.

Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics, stated that the declining inflation rate, particularly in services, reinforces the likelihood of further monetary easing by the ECB.

"Given the current trends and indicators of continued economic softness, the ECB is highly likely to cut rates further this month," Allen-Reynolds noted.

Eurostat’s latest figures also highlighted a positive development in employment, with the Eurozone’s unemployment rate falling unexpectedly to 6.1% in February from 6.2%, signaling resilient labor market conditions supported by previous rate cuts. Since June 2024, the ECB has reduced its deposit facility rate from 4% to its current level of 2.5%.

Tariff Uncertainty Weighs on Economic Outlook

Meanwhile, uncertainty persists as the Eurozone prepares for U.S. tariffs scheduled to take effect later this week. The administration of U.S. President Donald Trump plans to impose a 25% tariff on imported European automobiles, prompting concerns among economists about the potential inflationary or deflationary impact.

Bert Colijn, Chief Netherlands Economist at ING, underscored the uncertainty surrounding the implications of these tariffs.

"Tariffs from the U.S. may introduce deflationary pressures in Europe by limiting exports and slowing economic activity. However, retaliatory tariffs from the European Union could conversely add to inflation, as consumers ultimately bear these costs," Colijn explained.

Economists suggest the European Union’s policy response will significantly determine the tariffs' overall economic impact in the months ahead.