Panoramic view of central Corfu with a small restaurant in the old town of Corfu, Greece, May 2024.
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Euro zone inflation rose to 2.6 percent in May, statistics agency Eurostat said on Friday, but the better-than-expected figure did not shake market expectations of a rate cut by the European Central Bank next week.
Economists polled by Reuters had expected an increase of 0.1 percentage point from April’s headline reading of 2.4 percent.
Core inflation, which strips out the impact of changes in energy, food, alcohol and tobacco prices, rose to 2.9 percent from 2.7 percent in April. Economists polled by Reuters had expected steady growth.
The data comes as the ECB is widely expected to cut interest rates for the first time since 2019 when it meets on June 6. The central bank of the 20 euro zone countries began its latest rate-hiking cycle in July 2022, bringing interest rates from negative territory to 4%, where they currently stand.
Any deviation from a 25 basis point rate cut at the ECB’s June meeting would send a big shock wave through markets, given the strong signals policymakers have been sending over the past few weeks.
Following this announcement, money markets continued to fully price in a rate cut in June, followed by a one-off rate cut in 2024.
Headline inflation rose in May, but inflation is expected to remain volatile in the coming months due to base effects in energy markets and the unwinding of government support measures across the EU.
Overall, this headline figure is down significantly from a peak of 10.6% in October 2022 and has remained below 3% for the past eight consecutive months.
But ECB members may pay greater attention to the rise in services inflation, a key indicator of domestic inflationary pressures, to 4.1% from 3.7%.
Staff are also due to release their updated inflation and growth forecasts at their meeting next week, which will provide further clues about the pace and level of potential rate cuts this year.
ECB voting member and governing council member Klaas Knot said earlier this week that the next phase of deinflation would be “more volatile” and that monetary policy would need to be eased slowly and gradually to avoid inflation expectations deviating from forecasts.
Kamil Kovar, senior economist at Moody’s Analytics, said in a Friday note that the inflation rate is more likely “the last small hurdle on the road to de-inflation, rather than the start of a difficult final stretch.”
He added: “Still, expectations of a July rate cut have now sunk so deeply that, based on data from the past few weeks alone, the ECB is unlikely to cut rates in June either. If rates are cut in June, it will be because the momentum for rate cuts has been building over the past nine months.”
of EUR As of 11:30 a.m. London time, it was up slightly against the U.S. dollar and the British pound, maintaining gains made earlier in the session.
