Inflation in the eurozone rose unexpectedly to 2.5% in January, up from 2.4% in December, according to Eurostat figures. This increase may force the European Central Bank (ECB) to continue its cautious stance on interest rate cuts. At the same time, the European economy is facing new trade threats from the United States.
ECB remains cautious despite interest rate cuts
Core inflation, which excludes volatile components such as energy and food, remained higher than expected at 2.7%. While price increases in the services sector declined slightly, stubborn inflation indicators continue to pose a challenge to ECB policy.
The figures follow earlier reports from the eurozone’s largest economies. Inflation remained stable in Germany and France, while Italy and Spain saw an acceleration. This underlines that despite expectations that inflation will fall towards the ECB’s 2% target this year, price pressures in some countries could persist for longer.
Despite this increase, German government bonds held on to their gains. The yield on the 10-year bond fell six basis points to 2.40%, the lowest level in a month. Investors continue to expect three to four rate cuts this year, despite the recent rate cut to 2.75%.
Trump threatens trade war against Europe
In addition to inflationary pressures, the European economy is also threatened by the US’s protectionist trade policy. President Donald Trump announced that import tariffs on the EU are “definitely coming”, in addition to the tariffs already announced for China, Mexico and Canada.
Banque de France Governor François Villeroy de Galhau called US trade policy “very worrying” and described it as a “brutal measure”. He called for calm, but also stressed that Europe must look beyond defensive measures and develop strategies to stimulate economic growth.
“Protectionism seems advantageous at first because it protects your economy,” he told France Info Radio. “But experience shows that in the end everyone loses.”
ECB continues interest rate cuts, but with caution
Despite rising inflation, the broader trend in the euro zone is pointing toward disinflation, according to analysis by Bloomberg Economics. This could give the ECB room to continue cutting interest rates this year, possibly by easing by 100 basis points.
Nevertheless, the ECB remains cautious. Council member Peter Kazimir stressed that the central bank would not change its course abruptly. “We remain stable, adjust where necessary and focus on keeping the economy on track,” he explained.
ECB President Christine Lagarde said last week that wages in the eurozone are showing signs of cooling, supporting expectations that inflationary pressures will eventually ease, opening the way for further interest rate cuts.
Nevertheless, uncertainty remains high. Gediminas Simkus, head of the Lithuanian central bank, stressed that the ECB may need to make more than one rate cut to support the economy. “I don’t think the rate cut in March should be the last one, but we will continue to depend on the data,” he explained.
With a stagnating economy, rising inflation and new trade threats from the US, the ECB is balancing between stimulating economic growth and maintaining price stability. The coming months will be crucial for interest rate policy in the eurozone.
