Eurozone inflation tumbles, fuelling ECB rates debate

Eurozone inflation fell more than expected this month, as underlying price growth stalled, fueling speculation about the need for more European Central Bank rate hikes beyond the one scheduled for later this month.

In May, inflation in the eurozone’s 20 member countries fell to 6.1% from 7.0% in April, falling short of experts’ estimates of 6.3%.

However, the result came as just a little surprise to investors, given national statistics earlier this week had foretold the dip.

Core inflation, which excludes volatile food and fuel costs and has become more important in ECB policy discussions, dropped to 5.3% from 5.6%, significantly below estimates of 5.5%.

To confront runaway prices, the ECB has raised base rates by a total of 375 basis points to 3.25% in the last year, and has effectively committed to another 25 basis point hike on June 15 due to severe underlying price pressures.

“Today, inflation is too high and it is set to remain so for too long,” ECB President Christine Lagarde said on Thursday. “That is why we have hiked rates at our fastest pace ever – and we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.”

Several powerful officials, notably the central bank governors of Germany, the Netherlands, and Ireland, have already signalled a July rate rise, and other economists have concurred with the policy hawks.

They think that July must be considered, in part because the ECB has been mistaken about the inflation outlook for so long that it would like to err on the side of caution.