Euro Zone Inflation Falls Below ECB Target | Rate Cuts Loom in 2025
Euro zone inflation dips below ECB target, boosting expectations for rate cuts.
Euro zone inflation fell below the European Central Bank’s (ECB) target in May, driven by unexpectedly soft services costs, reinforcing expectations for further monetary easing.
Headline inflation in the 20-nation bloc slowed to 1.9%, down from 2.2% in April and below forecasts of 2.0%, largely due to a drop in energy prices and a steep decline in services inflation.
Core inflation, which excludes volatile energy and food prices, also cooled, falling to 2.3% from 2.7%, as services inflation eased to 3.2% from 4.0%, according to data from Eurostat.
With muted wage growth, lower energy costs, a firm euro, and sluggish economic momentum all pointing toward continued disinflation, markets are nearly certain the ECB will cut rates again on Thursday, its eighth reduction since June last year.
“Given the clear disinflationary outlook, especially for services, the ECB cutting rates this Thursday seems an easy bet, and more easing should follow later in the year,” said Riccardo Marcelli Fabiani of Oxford Economics.
This presents a challenge for the ECB, as short-term inflation is easing, but longer-term risks point to potential upward pressure on prices from multiple sources.
As a result, investors expect the ECB to pause after a June rate cut to 2%, with possibly one additional cut later in the year, likely in autumn. Markets also assign a roughly 30% probability to a further rate cut, which would lower the deposit rate to 1.5%.
With interest rates now in “neutral” territory—neither boosting nor hindering growth—some analysts argue for a wait-and-see approach to assess the economic impact of volatile U.S. trade policies.
Meanwhile, policy hawks caution that inflation could rebound due to persistent geopolitical tensions. Factors such as trade wars, rising tariffs, deglobalization, and corporate supply chain shifts are likely to stoke price increases.
Demographic trends, including a shrinking working-age population, along with rising defense and climate-related investments, could further add to inflationary pressures.
