Fall in Eurozone inflation boosts Mario Draghi's case for a dovish European Central Bank

 
Jasper Jolly
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The European Central Bank doves get a boost (Source: Getty)

Eurozone inflation retreated sharply in March, lessening the pressure on the European Central Bank (ECB) to tighten monetary policy.

Annual inflation fell to 1.5 per cent in March, down from two per cent in February, according to Eurostat.

The steep fall in inflation was prompted by the dissipating effect of fuel and food price rises which had seen the headline measure breach the ECB’s two per cent target for the first time since the end of 2012.

Read more: No signs European inflation overshoot is durable says top ECB economist

While energy prices still rose by 7.3 per cent in March, that was still a whole two per cent lower than the February increase. The price increase since the end of 2016 was prompted by the historic Opec deal to cut supply in an effort to shore up prices.

The fall in inflation had already been signalled by the drop in the headline rate for Germany yesterday. Europe’s largest economy saw the annual rate of price increases slow by 0.6 percentage points over the month.

The lower inflation validates the ECB’s judgement that the rise in inflation is not sustainable.

Read more: Lower German inflation gives European Central Bank some breathing space

Policymakers at the central bank had stuck firm to their line that they would look through inflationary price pressures until core inflation suggests the upward move in the headline rate will last.

Core inflation also fell from 0.9 per cent to 0.7 per cent this month, although some of this decline was due to distortion from Easter falling in April rather than March.

The ECB's chief economist, Peter Praet, this week reiterated his view inflation was not yet reaching sustainable levels.

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