Eurozone Inflation Drops to 1.9% in May, Further Raising Odds of EZB Rate Cut

The inflation rate in the Eurozone has dropped to 1.9%, below the European Central Bank's target of 2%. The decrease is attributed to lower energy prices and a decrease in the inflation rate for services. The ECB is likely to reduce interest rates further, with a 95% chance of a 0.25% decrease in the benchmark rate to 2.00%.

Eurozone inflation fell to 1.9% in May, according to flash data from Eurostat, below the European Central Bank's (ECB) 2% target. This figure is lower than the 2% expected by economists polled by Reuters [1]. The decrease is primarily attributed to lower energy prices and a decline in service inflation, which cooled from 4% in April to 3.2% in May [2].

Core inflation, which excludes energy, food, tobacco, and alcohol prices, also eased from 2.7% in April to 2.3% in May. The latest figures will be considered by the ECB as it prepares to make its next interest rate decision later this week. Markets are currently pricing in a 95% chance of interest rates being cut by a further 25 basis points on Thursday [1].

The ECB has been actively reducing interest rates to combat inflation and stimulate economic growth. In April, the central bank took its key rate, the deposit facility rate, to 2.25% — nearly half of the high of 4% notched in the middle of 2023. Economists predict a more than 80% chance of another rate cut in June and at least one more move before the end of the year, which would take the ECB’s deposit rate to 1.75% or lower [2].

Despite the transatlantic economic uncertainty, the Organisation for Economic Co-operation and Development (OECD) expects the euro area to expand by 1% in 2025, unchanged from its previous forecast. Euro area inflation is projected to come in at 2.2% this year, also in line with the March report [1].

The latest data suggests that the ECB will likely continue its dovish monetary policy stance to manage inflation and support economic growth. Investors should closely monitor the ECB's policy decisions and their potential impact on the Eurozone economy.

References:
[1] https://www.nbclosangeles.com/news/business/money-report/euro-zone-inflation-falls-to-cooler-than-expected-1-9-in-may-below-ecb-target/3714210/
[2] https://uk.finance.yahoo.com/news/eurozone-inflation-interest-rate-092004168.html