Inflationary tensions are easing in Europe and taking pressure off the European Central Bank (ECB) to continue monetary tightening. He CPI in the euro zone slowed down in May to 6.1% year-on-year. The data is nine tenths lower than that registered in April (7%) and returns inflation to the lowest level since February 2022, when Russia began the invasion of Ukraine, according to data published by Eurostat. In addition, the figure exceeds the expectations of analysts, who expected a decline to 6.2%. If food, alcohol and tobacco are excluded, the core inflation registered a drop to 5.3% from 5.6% of the previous month, thus chaining two months of falls. It is also better than consensus forecast.
Inflation has become one of the main factors influencing the global economy over the past year, making most goods and services more expensive. To combat this widespread price rise and fulfill its mandate to achieve stability, the ECB began to tighten its monetary policy in July last year, ending the era of zero rates. Thus, in just 11 months, the governing rates have gone from 0% to 3.75%, the highest level since October 2008. This represents the fastest rate increase in the history of the ECB.
At the beginning of May, the body chaired by Christine Lagarde decided to soften the rate of increases to 25 basis points, after having carried out several increases of 50 and 75 basis points. Inflation is still far from the 2% medium-term target, but the latest data is positive and suggests that the end of the rate hike is near. The consensus discounts a maximum of two additional interest rate increases of 25 basis points each, up to 3.75% in the deposit rate and 4.25% in the refinancing rate. In this way, the ECB would reach the end of the cycle of increases in July (after raising a total of 425 basis points in 12 months). In a speech today at a conference of the German Savings Banks in Hannover (north), Lagarde pointed out that the ECB must raise its interest rates more because “inflation is too high and it will continue like this for too long.”
The ECB has in fact no intention of pausing rate hikes yet and believes that it has not yet reached the necessary point of tightening in its monetary policy to achieve its mandate’s price stability objective. The minutes of the last meeting at the beginning of May confirm this and the majority opinion in the Governing Council of the ECB was to continue raising rates, accepting a rate of increase lower than that registered so far, of 25 basis points for the first time. since the beginning of the rate hike cycle, compared to 50 or 75 in previous decisions. “Most members indicated they could accept the proposed 25 basis point interest rate increase,” the minutes reveal. The document also shows how concern persists within the ECB about the evolution of core inflation. The minutes show that the evolution of this indicator is considered “worrying”.
Inflation in the euro zone reached a maximum last October of 10.6%. In April, it picked up one tenth to 7%, thus ending a streak of five consecutive months of slowdown. Now it’s smoothing out again, even more than expected. In addition, the economy has begun to suffer. Proof of this is the entry into recession in Germany, which has accumulated two consecutive negative quarters. That is why experts believe that interest rates will soon peak.
“In recent months, the dichotomy between controlling inflation and compromising economic growth has marked the road map of the main central banks,” says Mondher Bettaieb-Loriot, director of corporate debt at Vontobel, in a report, who estimates that “it is rates are likely to peak in Europe in June.” For her part, Lagarde said the cap would depend on her assessment of economic data.
Last Tuesday the preliminary CPI for May in Spain was released, which also showed signs of slowing down by falling to 3.2% year-on-year, almost one point below the annual rate registered in April, given the moderation in food prices and the drop in fuels. Inflation thus resumes declines and stands at a two-year low. As a consequence, the general director of Economy and Statistics of the Bank of Spain, Ángel Gavilán, affirmed that the organism will revise downward its inflation forecast for this year, from the current 3.7% to “close to 3%”.
Year-on-year inflation in Germany stood at 6.1% in the fifth month of the year, which represents a notable decrease compared to the 7.2% registered in April. The CPI in France also softened to 5.1%, eight tenths below the increase of 5.9% of the previous month. Italy’s CPI slowed to 7.6% in May from 8.2% previously. Inflation in Portugal fell to 4%.
In the absence of knowing the definitive data, inflation in Spain is one of the lowest of the euro countries, behind Luxembourg (2%) and Belgium (2.7%). The countries with the highest inflation rate are Slovakia (12.3%), Latvia (12.3%), Estonia (11.2%) and Lithuania (10.7%).
By components, in the euro zone energy registered a negative rate of 1.7% in May compared to the rise of 2.4% in April. The prices of food, alcohol and tobacco marked 12.5%, also lower than the 13.5% in April. In the case of non-energy industrial goods, its rate was 5.8%, below the 6.2% of the previous month, and services marked 5%, also below the 5.2% in April.
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