‘No victory yet’, ECB says as inflation slows in key countries

FRANKFURT: Falling inflation in top eurozone economies is “positive” news, a senior European Central Bank official said Wednesday, while warning that the battle against high prices was not over yet.

In Europe’s biggest economy Germany, inflation slowed to 6.1 percent year-on-year in May, preliminary data showed, down from 7.2 percent in April. The drop, which was bigger than analysts had expected, was mostly due to declining energy costs, federal statistics office Destatis said.

The picture was similar in neighbouring France where consumer price growth slowed to 5.1 percent in May, down from 5.9 percent a month earlier.

“The data that we have received yesterday and today is positive, it’s a decline in headline inflation,” ECB vice-president Luis de Guindos told reporters.

“But I would not say that the victory is there,” he said.

“We are on a correct trajectory and we have to look very carefully at the evolution of core inflation” which excludes volatile food and energy prices, he added.

Spanish inflation eased to 3.2 percent in May on the back of lower fuel costs, after hitting 4.1 percent in April, according to figures released on Tuesday.

Price growth in Italy meanwhile slowed to 7.6 percent from 8.2 percent in April — remaining elevated and well above the ECB’s two-percent target. The May inflation data for the entire 20-nation eurozone will be published on Thursday. It stood at seven percent in April.

The ECB has hiked interest rates by an unprecedented 3.75 percentage points since last July in an attempt to rein in rapidly rising consumer prices.

The inflation surge was largely fuelled by a jump in energy prices following Russia’s invasion of Ukraine, prompting European governments to unveil relief measures to cushion the impact on households and firms.

Despite this week’s inflation data suggesting the ECB’s monetary policy tightening was having an impact, analysts expect the Frankfurt institution to announce a further rate hike in June.

“The disinflationary trend in Germany is gradually broadening,” ING bank economist Carsten Brzeski said.

“However, it will not (yet) stop the European Central Bank from hiking rates again,” he said, predicting a rate increase of 25 basis points.

In a separate report published on Wednesday, the ECB warned that the higher interest rates were starting to bite.

Although economic conditions have “improved slightly” as energy prices have fallen, higher borrowing costs and stricter credit conditions “are testing the resilience” of euro area firms and households, the twice-yearly Financial Stability Review said.

Demand for new loans, especially mortgages, declined sharply in the first quarter of 2023, it found. The current price “correction” in real estate markets “could turn disorderly if higher mortgage rates increasingly reduced demand”, the report warned.

Financial markets and investment funds were also “vulnerable to disorderly adjustments”, it said, “particularly in the event of renewed recession fears”.

“The outlook for euro area financial stability remains fragile,” the report added.