Inflation Flames Tamed... But Eurozone's 'Interest Rate Hikes' Continue

There are consecutive signs that the inflation flames that have been holding back the Eurozone economy are subsiding. As the inflation rate slows down, expectations for a pivot in monetary policy are emerging in the market, but the European Central Bank (ECB) is still expected to continue raising interest rates to achieve a 'downward stabilization of inflation.'

Eurostat, the statistical office of the European Union (EU), announced on the 16th (local time) that the Eurozone's consumer price inflation rate for May was 6.1% compared to the same month last year. This matches the preliminary figure released earlier this month and shows a significant slowdown compared to the market forecast of 6.3%. The increase also narrowed by 0.9 percentage points compared to the previous month (7.0%), marking the lowest level since February last year (5.9%), when the Russia-Ukraine war broke out.

The Eurozone inflation rate fell from a peak of 10.6% in October last year to 6.1% in May. The core inflation rate, which shows the underlying trend of prices, also decreased slightly to 5.3% from 5.6% the previous month, marking a slowdown for two consecutive months. Foreign media reported, "Consumer prices decreased in 18 out of the 20 Eurozone member countries," and evaluated that "this shows that the Eurozone consumer price inflation, which had repeatedly hit record highs due to the surge in energy prices following the Russia-Ukraine war last year, is gradually stabilizing."

However, there are observations that the slowdown in core inflation in May is due to government intervention, and that from June to August, the inflation rate slowdown may stagnate again due to last year's base effect, making it unlikely to immediately affect the ECB's interest rate policy as a variable.

The ECB raised the Eurozone's benchmark interest rate by 0.25 percentage points from 3.75% to 4.00% one day before the inflation data was released. Unlike the U.S. Federal Reserve (Fed), which skipped a rate hike after ten consecutive increases the day before, the ECB continued its streak of eight consecutive rate hikes.

In its monetary policy statement that day, the ECB said, "Although the inflation rate is decreasing, it is expected to remain 'too high' for 'too long,'" clearly expressing its determination to bring the inflation rate back to the medium-term target of 2% in a timely manner.

After implementing a big step (a 0.5 percentage point increase in the benchmark interest rate) for the first time in 11 years in July last year, the ECB raised the benchmark rate by 0.75 percentage points twice consecutively in September and October last year, then continued with three consecutive big steps before returning to baby steps (0.25 percentage point increases), raising rates eight times in a row.

Christine Lagarde, President of the ECB.
Photo by EPA Yonhap News

The ECB is expected to continue its interest rate hikes for the time being. At a press conference that day, ECB President Christine Lagarde said, "We have no intention of taking a break," indicating that the benchmark interest rate will be raised again in July. The ECB emphasized that future decisions by the Governing Council will ensure that the benchmark interest rate reaches and maintains a sufficiently restrictive level to bring inflation back to the 2% medium-term target in a timely manner.

Meanwhile, amid high interest rates and high inflation, the Eurozone economy is cooling rapidly. The Eurozone's GDP growth rate in the first quarter decreased by 0.1% compared to the previous quarter, marking a technical recession phase following a contraction of 0.1% in the fourth quarter of last year. Germany, the largest economy in the Eurozone, also recorded a GDP growth rate of -0.3% in the first quarter, following -0.5% in the fourth quarter of last year, marking two consecutive quarters of negative growth.

This content was produced with the assistance of AI translation services.