Annual inflation in the euro zone accelerated in May, as initially expected, driven largely by the cost of services, while economists said the European Central Bank (ECB) will cut its deposit rate twice more this year, in September and December.
Eurozone inflation reached 2.6% in May 2024, up from 2.4% in April. A year ago, the rate was 6.1%, according to Eurostat, the European statistical office.
The rate was in line with the estimate published on May 31, and away from the European Central Bank’s target of 2%.
European Union annual inflation was 2.7% in May 2024, up from 2.6% in April. A year earlier, the rate was 7.1%.
Early this month, the ECB has cut interest rates for the first time in almost five years, saying its inflation forecasts had improved.
Luis de Guindos, Vice-President of the ECB, said on Tuesday that the best time to make rate decisions was coinciding with the release of the bank's updated macroeconomic projections, the next of which is slated for September.
“Those are the most significant and interesting moments from the point of view of monetary policy, because our projections are a very important indicator when it comes to decide the evolution of interest rates,” he told Spanish state broadcaster TVE.
According to a significant majority of economists polled by Reuters, the ECB will cut its deposit rate twice more this year, in September and December. They said the risks were skewed towards fewer rate cuts than expected.
That outlook was broadly unchanged from a survey conducted before the ECB delivered its widely telegraphed 25 basis point rate cut on June 6.
Improving business activity, strong wage data and still-sticky price pressures have increased uncertainties around the rationale for more cuts.
In an interview with Reuters on Monday, ECB Chief Economist Philip Lane said there was no “acute urgency” to lower interest rates if the economy continues to expand.
Still, a strong near-80% majority in the June 12-18 Reuters poll, 64 of 81, expected the ECB to cut twice more this year, in September and December, taking the deposit rate to 3.25%.
That was up from nearly two-thirds in May and just about half in an April survey. While 11 expected just one more reduction this year, six predicted three additional cuts.
Financial markets, which until recently were priced for one more cut this year, have started pricing in two reductions just in the past few days, in part related to turmoil in French bond markets following President Emmanuel Macron's decision to call snap parliamentary elections starting later this month.
