Eurozone Inflation Slips as Energy Prices Fall: What's Next for Interest Rates?
Slightly elevated-than-anticipated growth in inflation rates
Falling energy prices have pushed Germany's inflation rate to 2.1%, but underlying price pressure remains high, with economists predicting a slide below the ECB's target value for the first time since 2024.
Inflation in Germany and the Eurozone
The harmonized index of consumer prices (HICP) for Germany in May dropped from an initial estimate of 2.2% to 2.1%, according to Eurostat. The core rate, which excludes volatile energy and food prices, also decreased, coming in at 2.8%. However, these figures were higher than anticipated, with economists expecting a steeper decline.
Inflation for services eased in May, with the rate standing at 3.4%, down from 3.9% in April. Although Easter holiday factors played a role, price pressure in this area appears set to ease further, as wage growth in the eurozone slows and core inflation remains high.
On the contrary, the relatively high core inflation in May is attributed to the price development for goods, which almost doubled from 0.5% to 0.9%.
Inflation Trends Across Eurozone Economies
In Spain, Italy, and France, inflation also eased in May, according to preliminary data from their respective national statistics offices. Both Spain and Italy now have inflation rates of 1.9%, although Italy's inflation came in slightly higher than expected, while Spain's remained below forecast. France's inflation stands at just 0.6%.
ECB Interest Rate Decision and Future Outlook
The ECB's governing council is set to meet on Thursday to decide on the level of interest rates. A 25 basis point cut is virtually guaranteed, bringing the deposit rate to 2%. Economists are divided on whether the ECB will pause or implement another cut in July. Some expect the ECB to take a pause after the June rate cut, while others anticipate a possible deposit rate of 1.75%.
Market expectations suggest two more interest rate cuts from the ECB this year, one in June and the other in September. However, around 30% of economists urge the ECB against waiting longer than September for a second rate cut.
Enrichment Data
The current deposit rate stands at 2.25%, and a cut to 2% is widely expected after the June meeting. Market predictions show a just over 50% probability for a third cut in September, which would take the deposit rate below 2%. However, there is no significant discussion or forecast of future deposit rates beyond the present policy cycle.
The decrease in energy prices might impact the finance sector's analysis of upcoming interest rates, as the Harmonized Index of Consumer Prices (HICP) for Germany and other Eurozone economies, such as Spain, Italy, and France, are showing a downward trend in inflation rates. This trend, if sustained, could influence the European Central Bank's (ECB) interest rate decision scheduled for Thursday.
