Today's rise in German headline inflation is a reminder of just how difficult the final stretch will be for the European Central Bank to bring inflation back to 2% sustainably. Still, with every member of the ECB's governing council calling for another rate cut, anything other than a 25bp cut next week would be a big surprise, not to mention a major reputational hit for the central bank.
Discussions at the ECB seem to be shifting more to what happens after the June rate cut. Until now, rate-cutting cycles have been mostly triggered by recessions or crises. Fortunately, there is nothing currently threatening the eurozone economy. Therefore, there is no need for the ECB to be forced to cut rates or to implement longer-term rate cuts. Rather, the ECB will cut rates simply because it can, rather than because it has to. Or, as chief economist Philip Lane puts it, the ECB will “Remove the top limit“
In the context of the discussion of what will happen after the June meeting, the German data released today suggests that the risk of reflation is real, at least for central banks that define price stability as an inflation rate of 2.0%. This risk, combined with the gradual recovery of the Eurozone economy, limits the ECB's room to act beyond its June meeting.
