ECB to Cut Rates Next Week, Despite Higher May Inflation
Yesterday the Eurozone CPI showed an unexpected jump in May, giving EURUSD a boost, which was amplified by the soft US core PCE inflation.
Yesterday the Eurozone CPI showed an unexpected jump in May, giving EURUSD a boost, which was further amplified by the soft US core PCE inflation in the US session, sending the price close to 1.09. But, this pair retreated later in the day as ECB members ignored the jump in inflation, while markets are expecting a 25 basis points interest rate cut next week.
Eurozone May CPI Data Released by Eurostat – 31 May 2024
- Eurozone May CPI: +2.6% year-over-year, higher compared to the +2.5% expected and +2.4% in April.
- Eurozone May Core CPI: +2.9% year-over-year, higher compared to the +2.7% expected and +2.7% in April.
The Eurozone’s higher-than-expected inflation figures could pose a challenge for the ECB, which is reportedly considering lowering rates next week. However, recent comments from ECB members like Centeno suggest no immediate change in their plans, indicating that they may remain committed to their monetary policy stance despite the inflationary pressures.
The rise in core annual inflation in May, coupled with concerns that it could persist around 3% rather than the ECB’s target of 2%, adds complexity to the central bank’s decision-making process. While these developments may not alter the ECB’s intentions for June, continued consistency in the inflation data over the coming months could prompt a reassessment of monetary policy.
In response to the news, the euro showed strength, with EUR/USD trading higher at 1.0850, up from 1.0820 earlier in the European morning trading. Similarly, EUR/CHF has seen a bounce back to 0.9820s, up 0.5% from yesterday’s levels.
ECB Member Centeno’s Remarks from Friday:
- May inflation acceleration: The increase in May’s inflation was only slightly above the forecast.
- Impact on ECB policy: Centeno noted that this modest deviation still allows the ECB to initiate the easing cycle as planned.
Market Implications:
Centeno’s comments suggest that the ECB is not overly concerned with the slightly higher inflation figure and remains on track to begin its rate-cutting cycle. This implies that the ECB views the recent inflation uptick as manageable within the context of their broader economic strategy.
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