Hot Eurozone inflation data boost ECB rate hike expectations
Eurozone inflation rose to the highest since Sept. 2023
In May, Eurozone inflation rose to 3.2%, in line with forecasts and following a 3.0% increase in April. This marks the highest inflation rate in nearly three years and is still well above the ECB's target of 2%. Core inflation, which excludes volatile components such as energy, food, alcohol, and tobacco, accelerated to 2.5% from 2.2% in April. Inflation in the services sector increased to 3.5% from 3.0%.
The main cause of the rise was growing energy costs, which increased by 10.9% year over year. The Hormuz Strait's continuous limitations have kept oil prices high. The CPI inflation readings have been above consensus predictions due to the rise in energy costs. Conversely, inflation in Germany moderated more than anticipated in May, with the CPI declining by 0.2% month-over-month and slowing to 2.6% year-over-year, below the expected 2.9%.
The EUR/USD exchange rate showed little movement following the CPI release, consolidating above 1.1640 as markets adjusted ECB rate hike expectations upward in response to robust UK inflation data. However, overall momentum remains subdued as investors maintain a cautious outlook ahead of key upcoming economic releases.
Hot CPI raised hopes for an ECB rate hike
The May inflation figures have heightened expectations for an ECB rate increase. Market participants assign a high probability to a 25 basis point rate hike on June 11, with at least one additional increase anticipated by year-end.
ECB officials have also indicated the potential for a rate hike in June. ECB Governing Board member Isabel Schnabel recently stated that even if a swift resolution to the Middle East conflict is achieved, a rate increase next month remains necessary. "Given the magnitude and persistence of the current shock, ignoring the situation is no longer an option in my view. From today's perspective, I believe we will need a rate hike in June. - Isabel Schnabel said.
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