Euro-Zone Inflation Falls Below 2%, Boosting Odds of ECB Rate Cut This Week

Euro-zone inflation slowed to 1.9% in May, dipping below the European Central Bank’s (ECB) 2% target for the first time in eight months, reinforcing expectations of an interest rate cut at this week’s ECB meeting.

Key Inflation Data Strengthens Case for Rate Cut

According to the latest figures, consumer prices rose 1.9% year-on-year in May, down from 2.2% in April and below economists’ forecasts. Core inflation, which excludes volatile food and energy prices, also cooled to 2.3%, while price pressures in the services sector eased significantly.

This marks only the second time since mid-2021 that inflation has not exceeded the ECB’s target, a stark contrast to the record 10.6% peak in October 2022 following Russia’s invasion of Ukraine.

ECB Rate Decision: What to Expect

The data arrives just before the ECB’s two-day policy meeting, where officials are widely expected to cut the deposit rate by 25 basis points to 3.75%. Financial markets have fully priced in the move, with traders anticipating another cut later this year, likely in September.

However, economists caution that some of the slowdown may be due to temporary factors, such as the reversal of Easter-related price hikes in April. Bloomberg economist Simona Delle Chiaie noted:

“Much of the decline might simply reflect a reversal of temporary pressures in April. Still, several factors—including US tariffs—suggest further price moderation ahead.”

Trade Wars and Economic Uncertainty Loom

The ECB’s decision comes amid rising trade tensions between the US and Europe. President Donald Trump’s proposed tariffs—including a potential 50% levy on EU steel and aluminium imports—could disrupt economic stability. The EU has warned of retaliatory measures, adding uncertainty to the inflation outlook.

German Chancellor Friedrich Merz is set to meet Trump this week, with trade policy high on the agenda. The ECB will also release updated economic projections, which could show lower inflation forecasts for 2025-2026.

Wage Growth and Consumer Expectations

Despite record-low unemployment (6.2%), wage growth is slowing, raising concerns that inflation could fall below target in the long run. Meanwhile, consumer inflation expectations have risen to 3.1%, the highest since February 2024, suggesting lingering price concerns among households.

Conclusion: ECB’s Next Moves

With inflation now below target and economic risks mounting, the ECB appears set to cut rates this week. However, future decisions will depend on trade developments, wage trends, and geopolitical factors, making the path beyond June less certain.

Stay updated on ECB policy decisions and euro-zone inflation trends as the central bank navigates a shifting economic landscape.