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Eurozone inflation fell below the European Central Bank’s 2 per cent target in May for the first time in seven months, in figures economists said made further interest rate cuts this year more likely.
May’s annual inflation reading of 1.9 per cent was down from April’s 2.2 per cent figure and below analysts’ expectations of 2 per cent in a Reuters poll.
It is the first time inflation has been below the 2 per cent goal since September, when it briefly dropped to 1.7 per cent after exceeding the target for more than three years.
The euro slipped after the data was published on Tuesday, down 0.6 per cent by late afternoon, trading at $1.137.
In a reference to the impact of US President Donald Trump’s tariffs, Diego Iscaro, an economist at S&P Global Market Intelligence, said the decline in inflation would “offset some of the headwinds on consumption stemming from a highly uncertain economic environment”.
He forecast that price pressures would ease further over the coming months because of the stronger euro, cheaper commodities and a softer labour market, adding that he expected the ECB to lower its benchmark deposit rate from its current 2.25 per cent to 1.5 per cent in the third quarter.
The central bank will make its next interest rate decision and update its inflation forecasts on Thursday. It forecast in March that inflation in the currency area would hover above target this year, before falling to 1.9 per cent in 2026.
In trading after Tuesday’s data release, swaps markets continued to expect another quarter-point cut in the ECB’s benchmark interest rate on Thursday. That would take the rate to 2 per cent — the lowest level in more than two years and half that of June 2024, when the central bank started to reduce borrowing costs.
Two quarter-point cuts are priced in by this time next year.
Commerzbank economist Vincent Stamer said current consumer price trends implied the ECB would on Thursday be “in the comfortable position of being able to lower its [full-year inflation] projections”, adding that this should open the door for one more quarter-point rate cut after the one expected this week.
Riccardo Marcelli Fabiani, an analyst at Oxford Economics, said a quarter-point cut this week was “an easy bet” and that “more easing should follow later in the year” as inflation was likely to slow further.
Tuesday’s figures showed that core inflation, excluding volatile food and energy prices, fell to 2.3 per cent in May compared with 2.7 per cent in April.
The closely watched figure for services inflation — a gauge for domestic price pressures — dropped to 3.2 per cent, the lowest level since March 2022. It had reached 4 per cent in April.
