Germany inflation rate rises to 2.4% in May

Germany's inflation rate rose to 2.4% in May, potentially not influencing the ECB's upcoming interest rate decision but the tone.

By Ahmed Azzam | @3zzamous | 29 May 2024

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  • Consumer prices rose 2.8% year-on-year, above economists' forecast of 2.7%

  • ECB set to cut interest rates next week

Germany inflation uptick

Germany's annual inflation rate inched up to 2.4% in May from 2.2% in April, reaching a three-year low in line with expectations, preliminary data showed on Tuesday. The rise was driven by higher prices for services and food, while costs for goods eased and energy prices continued to fall.

German 10-year bond yields increased six basis points to 2.65%, the highest level since November. The two-year yield, more sensitive to interest rate changes, was close to a six-month high at 3.09%.

The latest inflation data is unlikely to deter the European Central Bank (ECB) from cutting borrowing costs on June 6, marking the first reduction since an unprecedented series of hikes aimed at curbing runaway price increases. However, the figures might make policymakers more cautious about future rate cuts.

Monetary policy debate

ECB Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel have cautioned against rapid monetary easing and opposed consecutive rate cuts in June and July. In contrast, France’s central bank governor Francois Villeroy de Galhau suggested on Monday that such a scenario should not be dismissed.

Yen watch

Separately, Bank of Japan board member Seiji Adachi indicated that the central bank might raise interest rates earlier if the depreciation of the Yen accelerates or persists. Speaking on Tuesday, Adachi stressed the importance of avoiding premature rate hikes but warned that focusing too much on downside risks could lead to an inflation spike, necessitating sharp monetary tightening later.

Adachi emphasized the need for gradual adjustment of monetary support based on economic, price, and financial developments, provided underlying inflation trends towards the 2% target. He projected consumer inflation to re-accelerate from summer through autumn due to rising import costs and sustained wage gains. However, he noted that if the Yen's decline continues, "consumer inflation could rebound sooner than expected."

"If this occurs when inflation is likely to exceed 2% durably and stably, we may need to advance the timing of an interest rate hike," Adachi said.