Prices ease but likely too little to persuade ECB to cut interest rates 

Underlying inflation, closely watched by the ECB, fell less than financial market economists were anticipating

ECB president Christine Lagarde  signalled a move before June’s meeting was unlikely by describing eagerly awaited wage data due just before that as 'critically important'.

Eurozone inflation eased slightly to 2.8% in January from 2.9% in the previous month, but financial markets are watching closely whether price pressures are on their way to falling below the European Central Bank's target of 2% that could lead to a rate cut in the coming months.  

Underlying price pressures which are monitored by the ECB, as they exclude volatile energy and food costs, dipped only slightly to 3.3% from 3.4%, while services inflation, which can be driven by wage growth, was unchanged at 4%. Meanwhile, the inflation rate for unprocessed food and energy prices fell in the month, to 3.6% from 3.9%. 

Inflation in Ireland, as measured by Eurostat, dropped to 2.7%, according to the so-called flash estimate, remaining slightly below the average rate across the whole of the eurozone, the figures confirmed. 

While the ECB itself expects inflation to reach its 2% target only in 2025, market economists, along with some on the bank's governing council, have discussed the chances of a faster deceleration.  

The market reaction to the release was muted. Traders are pricing almost six quarter-point rate cuts this year and see a near 90% chance of the first coming by April. The yield on the German two-year bonds — among the most sensitive to changes in monetary policy — traded slightly higher at 2.47%. 

President Christine Lagarde said last week the governing council wanted to be “further along the disinflation process to be sufficiently confident”. 

This week, she signalled a move before June’s meeting was unlikely by describing eagerly awaited wage data due just before that as “critically important”. 

In the US, the Federal Reserve has also sought to temper easing expectations, with chair Jerome Powell on Wednesday night pouring cold water on talk of a March cut. 

“A smaller decline in headline inflation than Bloomberg Economics had anticipated adds to our view that the ECB probably won’t think it has enough information by the time the March projections are assembled to make substantial downward revisions to its medium-term outlook," said Maeva Cousin, an economist at Bloomberg. 

"Chances are this judgment is delayed until June, giving hawks the space needed to push the first rate cut until then,” she said. 

Some of Ms Lagarde’s hawkish colleagues are inclined to be similarly patient, though others are pushing for cuts sooner rather than later. 

• Additional reporting Bloomberg