The inflation rate in the Eurozone has reached the target set by the European Central Bank (ECB), settling at 1.9% for May, as reported by Eurostat. This marks a return below the symbolic 2% threshold, a development that strengthens calls for further cuts in official interest rates. The timing, just days before an important ECB Governing Council meeting, adds weight to the argument for monetary easing.

Despite the initial ripples of a trade war, its impact on prices within the EU has been subdued, not exerting upward pressure on inflation. Brussels has temporarily halted retaliatory measures to allow room for negotiations with the United States, indicating no immediate inflationary threats from protectionist responses.

Data from Eurostat suggests that the primary drivers of the 2022 inflation crisis—namely fuel and energy—continue to dominate price trends in the Eurozone. The energy component of the index fell to 3.6% in May, contrasting with other sectors that remained positive. Additionally, the prices of services, which have lagged behind other inflationary factors, saw a decline; they rose by 4% in April but only by 3.2% in May.

Another critical factor giving the ECB leeway to lower interest rates is the decline in core inflation, which excludes the most volatile items like energy and fresh food, now down to 2.5%. This measure is closely monitored by monetary authorities when making policy decisions.

Recent data from major Eurozone economies had already suggested a downward trend, corroborated by Eurostat's findings. Prices fell in varying degrees in Germany (2.1%), France (0.6%), Spain (1.9%), and the Netherlands (3%). These countries, alongside Italy, heavily influence the overall weighted data. In contrast, smaller economies such as Estonia (4.6%), Croatia (4.3%), and Slovakia (4.3%) experienced price increases, yet their impact on the aggregate statistic is limited.

Such figures have led ING Research to assert that a rate cut at this Thursday's ECB meeting is inevitable. Nonetheless, they caution that "hawks" within the ECB might advocate for a pause in rate reductions, considering the Eurozone's unexpected resilience, which surprised on the upside in the first quarter. This resilience, coupled with ongoing uncertainties in trade negotiations and tariff announcements, could persuade some ECB members to delay further cuts until the July meeting.

Despite these considerations, analysts maintain that a downward revision of inflation forecasts and the unexpected early drop in headline inflation below 2%, combined with the risk of inflation undershooting expectations, should tip the scales towards a 25 basis point interest rate cut.