Eurostat, the statistical office of the European Union, has published data showing euro area annualised inflation slipping below the ECB’s target rate of 2%, leading HSBC to call the end of rate cuts for now.
The rate in May fell to 1.9%, down from 2.2% in April. A year earlier the rate was 2.6%. These figures mask local differences in the euro area however: lower rates were seen in Cyprus (0.4%), France (0.6%) and Ireland (1.4%). The highest annual rates were recorded in Romania (5.4%), Estonia (4.6%) and Hungary (4.5%).
Georgios Leontaris, CIO, EMEA, Global Private Banking and Premier Wealth at HSBC, said: “Eurozone inflation for May was confirmed at 1.9% in today’s release, the first sub 2% print since September. The progress in inflation has validated the approach of the ECB which recently delivered its eighth interest rate cut in the current cycle, slashing the deposit rate from 4% to 2%.”
“Headline inflation is near or below the 2% level in most major eurozone economies, whereas core inflation came in at 2.3%. Although the trajectory of realised inflation has certainly provided relief that the eurozone has successfully reigned in price pressures whilst ensuring resilience in growth, a number of key questions continue to loom for investors, such as ongoing geopolitical and trade uncertainty.
“Governing Council member Villeroy yesterday acknowledged that the fluctuations in oil prices need to be assessed by the ECB when setting its borrowing costs, as do moves in currencies. The strength in EUR has contributed to curbing some of the inflationary pressures, and the degree to which any further de-dollarization continues could affect this going forward.
“The decline in energy prices (20% below March levels during the June ECB meeting) played a key role in reducing the ECB’s inflation estimates to 1.6% for 2026, from 1.9% previously – so if oil prices were to persist at today’s levels or spike higher, this could be partially reversed by the time the ECB updates its assumptions again in September.
“EUR maintained its 1.15 level post inflation release, whereas Bund yields saw only a marginal move higher given the release was in line with expectations. The market may look past realised inflation, given that the ECB’s latest guidance has already confirmed that the cutting cycle has “just nearly concluded” and is “well positioned” to navigate uncertainty. Our assessment is that the ECB is unlikely to deliver any further interest rate cuts for now, and instead will be keen to see whether future data maintains its resilience and how trade developments will unfold.
“The EUR has managed to strengthen despite lower interest rate differentials with the US, and we expect some further strength towards the 1.20 level by year end. In fixed income, we maintain our preference for quality bonds, focusing on the 7-10 year part of the curve.”
