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Eurozone inflation accelerates in May: Are ECB rate cuts in doubt?

People walking the main shopping street in Dortmund, Germany.
People walking the main shopping street in Dortmund, Germany. Copyright Martin Meissner/Copyright 2023 The AP. All rights reserved.
Copyright Martin Meissner/Copyright 2023 The AP. All rights reserved.
By Piero Cingari
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The harmonised index of consumer prices rose by 2.6% year-on-year in May, surpassing forecasts. Core inflation also increased to 2.9%. This comes as the European Central Bank (ECB) prepares for a potential rate cut on June 6.


Eurozone inflation surged in May, surpassing economists' expectations just days before the European Central Bank (ECB) is set to convene to announce the first interest rate cut in four years.

According to preliminary data from Eurostat, the harmonised index of consumer prices (HICP) in the eurozone rose by 2.6% year-on-year in May, up from 2.4% in April and exceeding the forecast of 2.5%. This marks the first increase in the annual inflation rate since December 2023. On a monthly basis, the HICP climbed by 0.2%, a slowdown from April’s 0.6%.

Notably, energy inflation turned positive at 0.3% year-on-year for the first time since April 2023. Core inflation, which excludes food and energy, also rose in May, ending nine months of disinflation. The core inflation rate increased from 2.7% in April to 2.9% in May, surpassing the 2.8% expectation. Monthly core inflation edged up by 0.4%, decelerating from April’s 0.6%.


Among member states, the highest annual inflation rates in May were observed in Belgium (4.9%), Croatia (4.3%), and Portugal (3.9%). The latter, recorded its highest annual inflation rate in a year. 

Conversely, Finland (0.5%), Italy (0.8%), and Lithuania (0.8%) had the lowest annual inflation rates.

Will the ECB refrain from cutting interest rates next week?

The May flash inflation data is one of the last critical inputs before the ECB's meeting on June 6, where a 25-basis-point cut is widely expected. 

Several ECB policymakers have recently indicated a preference for a rate cut in June, which should suggest that a slight upside surprise in inflation is unlikely to alter their plans.

By not cutting interest rates, the ECB could send a worrying signal to market participants that they believe inflationary pressures are re-emerging and that maintaining restrictive interest rates is necessary. 

It is highly anticipated that they will proceed with the rate cut in June without committing to further reductions, as Chief Economist Philip Lane outlined in his May 27 speech.

Lane emphasised that the pace of future rate cuts will be slower if there are upward surprises in underlying inflation, particularly in domestic and services sectors.

The ECB forecasted an average core inflation rate of 2.5% year-on-year for the second quarter of 2024.

Given the 2.7% reading in April and 2.9% in May, the June reading would need to be between 2% and 2.1% to align with the prior ECB's forecast, which seems unlikely. 

The cut-off date for the ECB’s June macroeconomic projections has passed, suggesting that a slight upward revision to second-quarter core inflation estimates will be on the cards. 

President Christine Lagarde could also communicate during the press conference that the return to the 2% target for core inflation might be slightly slower than previously forecasted.

Money markets are currently pricing in 61 basis points of ECB rate cuts by year-end, implying only one additional 25-basis-point cut for 2024 after June's expected cut.

Market reactions

Following the inflation report, the euro edged slightly higher against the dollar, with the EUR/USD exchange rate rising to 1.0840. 

Bond yields among major European countries increased, with Germany’s 10-year Bund yield climbing to 2.7%, potentially reaching the highest daily close since mid-November 2023. 


Italian and French yields also rose by about 4 basis points. 

Major European indices inched lower, with the DAX and CAC 40 down 0.2%, and the broader Euro Stoxx 50 falling by 0.1%.

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