Frankfurt, Germany – Inflation data released today revealed a rise in core inflation, excluding the volatile effects of energy, food, alcohol, and tobacco. The increase to 2.9% from 2.7% in April surpassed economists’ expectations of a flat reading. The European Central Bank (ECB) is widely anticipated to cut interest rates at its upcoming meeting on June 6, marking the first reduction since 2019. The central bank for the 20-nation euro area had initiated a hiking cycle in July 2022, pulling rates out of negative territory to their current level of 4%.
Market analysts predict that any deviation from a 25 basis point cut at the ECB’s June meeting would come as a major shock, given the strong signals sent by policymakers in recent weeks. The markets have already fully priced in a June cut, with expectations for just one more reduction in 2024. Despite an increase in headline inflation in May, fluctuations are forecasted in the coming months due to base effects from the energy market and the unwinding of government fiscal support schemes across the eurozone.
While the headline figure has significantly cooled from its peak of 10.6% in October 2022, remaining below 3% for the past eight consecutive months, ECB members are closely monitoring the rate of services inflation. This indicator of domestic inflationary pressures rose to 4.1% from 3.7%. Next week, the ECB staff is set to release their latest round of inflation and growth projections at the meeting, offering further insights into the potential pace and extent of cuts this year.
In a recent statement, ECB voting member Klaas Knot emphasized the need for gradual easing of monetary policy to prevent inflation expectations from deviating from forecasts. Senior economist Kamil Kovar at Moody’s Analytics noted that the recent inflation increase is likely a temporary bump in the disinflationary trend. Despite some speculations of a July cut, the possibility remains uncertain, with the decision in June depending on momentum built over the past nine months.
As the euro showed slight gains against the U.S. dollar and British pound in London trading, the upcoming ECB meeting continues to garner significant attention from investors and market participants. The uncertainty surrounding the rate cuts and their potential impact on the eurozone economy adds to the anticipation leading up to the crucial decision on June 6.