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Eurozone inflation edges back up, but ECB rate cut still on cards

Eurozone business activity going from 'bad to worse'
Source: Pixabay

Annual inflation in the eurozone ticked back up in May, official data showed Friday, but the setback was seen as temporary and unlikely to deter the European Central Bank from cutting interest rates next week.

The data will however weigh on the ECB’s moves in July and beyond, reinforcing expectations that the bank’s decision on June 6 will not kickstart a rapid rate-cutting campaign.

Consumer prices in the single currency area rose faster than expected to 2.6 percent in May from a year earlier, up from April’s 2.4-percent rate, the EU’s statistics agency said.

The figure is above the ECB’s two-percent target.

ECB officials will be disappointed by the data for core inflation, which strips out volatile energy, food, alcohol and tobacco prices and a key indicator of the bank.

That rate ticked up again to 2.9 percent in May, up from 2.7 percent in April.

Analysts surveyed by FactSet and Bloomberg had forecast that consumer prices would rise to 2.5 percent and predicted that core inflation would be stable.

The ECB aggressively hiked rates from July 2022 to tame soaring inflation but has frozen borrowing costs in the past few months amid growing pressure for a rate cut.

Consumer prices have been steadily falling from a peak of 10.6 percent in October 2022 following Russia’s all-out invasion of Ukraine and the subsequent impact on energy costs.

Riccardo Marcelli Fabiani, senior economist at Oxford Economics, said the May rise “was driven by temporary factors and does not mean that the deflationary process has stopped”, adding that it would not “prevent the clearly-communicated” June rate cut.

“But the European Central Bank will be cautious and is unlikely to lower interest rates at the July meeting, given the momentary interruption of disinflation, especially in services, and the strong wage data,” he added.


– ECB moves ahead of Fed? –


There is wariness at the ECB about lowering rates again in July as it prepares to reduce borrowing costs before the US Federal Reserve.

Bank of Finland governor Olli Rehn, one of 25 members of the ECB’s governing council, told AFP this month that the bank was not “pre-committing to any rate path”.

“The May inflation serves as a warning that next week might not mark the start of a traditional cutting cycle,” Bert Colijn, senior eurozone economist at ING bank, said.

Services recorded the biggest price rise in May at 4.1 percent, up from 3.7 percent the previous month.

After declining for several months, energy prices rose again by 0.3 percent in May after recording a 0.6 percent drop in April, according to Eurostat.

Food, alcohol and tobacco price increases slowed however, to 2.6 percent in May from 2.8 percent the previous month.

Across the eurozone, Latvia recorded the lowest inflation rate in May, at 0.2 percent, Eurostat data showed. Finland came second, registering an inflation rate of 0.5 percent in May.

Belgium was the highest at 4.9 percent.

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Agence France-Presse (AFP) is a French international news agency headquartered in Paris, France. Founded in 1835 as Havas, it is the world's oldest news agency.

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