Eurozone inflation falls below target to 1.9%

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Eurozone inflation fell below the European Central Bank’s 2 per cent target in May for the first time in seven months, as it considers a further cut to interest rates this week.

May’s annual inflation reading of 1.9 per cent was down from April’s 2.2 per cent figure and below analyst expectations of 2 per cent in a Reuters poll.

It was the first time annual inflation was below the 2 per cent goal since September, when it briefly dropped to 1.7 per cent after exceeding the target for more than three years.

The euro slipped in immediate trading after the data publication on Tuesday, down 0.3 per cent on the day at $1.141.

The ECB will update its inflation forecasts and make its next decision on interest rates on Thursday. The central bank predicted in March that inflation in the currency area would hover above its medium-term 2 per cent target this year, before falling to 1.9 per cent in 2026.

Before Tuesday’s inflation numbers, financial markets had priced in another quarter-point cut in the ECB’s benchmark interest rate on Thursday to 2 per cent — the lowest level in more than two years and half the level in June 2024, when the central bank started to reduce rates.

Such a move would mean the ECB was “entering the final stages of its rate-cutting cycle”, Konstantin Veit, a portfolio manager at Pimco, wrote in a note to clients.

“Underlying cost pressures continue to dissipate, with wage pressures easing somewhat faster than previously expected,” said Veit, adding that lower energy prices and a stronger euro could also drag down inflation.

This is a developing story