Inflation within the Eurozone has dipped below the European Central Bank’s (ECB) target of 2%, registering at 1.9% in May, according to preliminary statistics released by Eurostat on Tuesday. This decrease was attributed largely to significant drops in the services sector.
Economists surveyed by Reuters had predicted that the inflation rate for May would align with the prior month’s rate of 2.2%, but the actual figures showed a notable decline.
Services inflation saw a substantial reduction, falling to 3.2% from 4% the previous month. Core inflation, which excludes volatile items such as energy and food prices, also eased, dropping from 2.7% in April to 2.3% in May.
Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, remarked that the significant fall in services inflation reflects a downward trend rather than a temporary spike, noting that it is the lowest level observed in over three years.
As inflation approaches the ECB’s target, the central bank is preparing for its upcoming interest rate meeting this week. In April, the ECB had raised its key rate, known as the deposit facility rate, to 2.25%, down from the peak of 4% achieved in mid-2023.
Current market expectations indicate a high likelihood—approximately 95%—of a 25-basis-point interest rate cut during this Thursday’s meeting. However, Allen-Reynolds suggested that the latest inflation data may have a limited impact on the ECB’s imminent decision.
He pointed out that the inflation figures bolster the argument for an additional rate cut at the next meeting scheduled for July.
The global economic landscape, however, remains uncertain. U.S. President Donald Trump’s proposed protectionist tariffs are casting a shadow over economic projections, particularly with reciprocal tariffs set to impact the European Union and potentially inhibit growth. The immediate effects of these tariffs on inflation are still being evaluated, with central bank experts asserting that the consequences will depend on potential retaliatory actions.
Despite these transatlantic economic challenges, the Organisation for Economic Co-operation and Development (OECD) maintained its forecast for 1% economic growth in the euro area for 2025, with inflation predictions for the region steady at 2.2% for the year, consistent with earlier estimates from March.
Following the release of the recent inflation data, bond yields in euro area countries decreased, with the yield on Germany’s 10-year bond falling by over two basis points to 2.499%, while the French equivalent saw a decline of more than one basis point to 3.169%.
The euro was trading approximately 0.3% lower against the dollar.
