Pressure mounts on ECB as inflation cools in eurozone
Annual inflation in the eurozone eased to its weakest rate for a year in May, putting further pressure on the European Central Bank to take action.
Eurostat, the European Union’s statistics office, confirmed that annual inflation in the eurozone was 1.2% in May, compared to 1.7% in April and 2.0% in May 2018.
Across the EU, inflation fell to 1.6% against 1.9% in April and 2.0% a year earlier. Inflation eased in 16 countries, remained stable in five and rose in six.
The biggest contributor to inflation was the services sector, followed by energy, then food, alcohol and tobacco, and then non-energy industrial goods.
Core eurozone inflation, which takes out the more volatile elements of food and energy, was 1.0% against 1.4% in April. Stripping out food, alcohol and tobacco as well, the rate slipped further, to 0.8%.
The ECB is struggling to meet its 2% inflation target and analysts believe the latest data from Eurostat, its final update for May, could force the bank’s hand.
Alessandro Capuano, head of brokerage and business development at FinecoBank, said: “Further steps should be taken within the eurozone to get inflation back on track, so a further cut in interest rates, taking them into negative territory, could be on the cards.
“In a time when risks to the EU economy are rising, including trade wars affecting the German manufacturing sector and Brexit, the ECB should stand firm and provide more stimulus, both to support member economies and shore up the euro, which has been struggling of late.”
The inflation data coincided with a speech by ECB president Mario Draghi at the bank’s annual forum in Sintra, Portugal. He gave the strongest signal yet that the ECB could launch a fresh round of easing measures, stating: “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.”
Neil Wilson, chief market analyst at Markets.com, said: “Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode; the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks to be a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.
“This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing eurozone economy. Inflation expectations are being crushed [and] economic indicators continue to show a deep and persistent slowdown.”
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: “We suspect that core inflation will rebound to 1.0%-1.1% in June, boosted in particular by a rebound in French housing inflation. Energy inflation, however, will fall further over the summer, dragging the headline down further, to 1% or even slightly lower, if the recent trend in oil prices is sustained.
“If we’re right, it would further accentuate the ECB’s focus on weak inflation expectations, adding the pressure for a rate cut in line with Draghi’s comments in Sintra.”