Eurozone inflation rose for the first time this year, reaching 2.6 percent in May, a concerning sign for investors hoping the European Central Bank (ECB) will aggressively cut interest rates in 2023. The increase in consumer prices across the single currency zone was up from 2.4 percent in the previous month and slightly above the level forecast by economists.
Core inflation also accelerates
Core inflation, which excludes volatile energy and food prices, also accelerated from 2.7 percent to 2.9 percent. This suggests underlying price pressures are building in the Eurozone economy.
Until this month, Eurozone inflation had been steadily declining towards the ECB’s 2 percent target, allowing policymakers to signal they expected to start cutting the benchmark interest rate from its record high of 4 percent as soon as next week. However, the uptick in inflation in May has thrown that plan into doubt.
German 10-year bond yields, a benchmark for Eurozone borrowing costs, jumped to 2.7 percent in response to the inflation data, reaching their highest level in over six months.
ECB still expected to cut rates, but cautiously
The ECB is still widely expected to go ahead with an interest rate cut next week, which would make it the first major central bank to ease monetary policy since the surge in inflation began three years ago. But with price pressures picking up again, investors now expect the ECB to adopt a more cautious approach to further rate reductions for the rest of 2023.
Services inflation also rises
Eurozone services inflation also rose to a seven-month high of 4.1 percent in May, up from 3.7 percent the previous month. This is a concerning development, as the services sector is typically more sensitive to wage pressures.Â
Outlook for further rate cuts dimmed
Overall, the surprise increase in Eurozone inflation in May has cast doubt on the ECB’s plans for aggressive interest rate cuts in 2023, as policymakers will now need to tread more carefully to ensure they bring inflation back to their 2 percent target without undermining the economic recovery.
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