Despite Rising Inflation, Interest Rate Cuts in Europe Still Possible

The inflation rate in Europe accelerated by 2.6% year-on-year in May, a figure that exceeds expectations, while the painful rise in consumer prices is taking time to fade. Nevertheless, this is unlikely to prevent the European Central Bank from making its first interest rate cut next week. According to data from the European Union statistics agency Eurostat, the inflation rate in the twenty countries using the euro reached 2.4% in April. Markets had anticipated that the inflation rate in May would be 2.5%, and officials at the European Central Bank are likely to be disappointed by the core inflation data, which excludes volatile energy, food, alcohol, and tobacco prices and is a key indicator for the bank. The data also showed that core inflation rose to 2.9% in May from 2.7% in April. Analysts surveyed by FactSet and Bloomberg had expected core inflation to remain stable. The European Central Bank has aggressively raised interest rates since July 2022 to curb high inflation, but it has kept borrowing costs unchanged in recent months amid increasing pressure to lower interest rates.