Eurozone inflation dropped to 1.9% in May, slipping below the European Central Bank’s 2% target, according to Eurostat. This decline, driven by falling energy costs and a notable slowdown in services inflation, strengthens expectations of an interest rate cut at the ECB’s upcoming meeting.

Core inflation, excluding food and energy, also cooled to 2.3% from 2.7%, further supporting the case for monetary easing. Since June of last year, the ECB has cut rates seven times. Current conditions, including muted wage growth, easing prices, and tepid economic expansion, suggest another cut is imminent.

However, long-term inflation risks persist. Potential upward pressures include trade tensions, tariffs, geopolitical instability, demographic shifts, and increased defense and climate spending. These opposing trends could prompt the ECB to pause further cuts after June, with only one more reduction anticipated in autumn.

While interest rates are now seen as “neutral,” policymakers remain cautious. The ECB typically looks past short-term fluctuations, targeting inflation over the medium term. Yet, if declining inflation begins to influence longer-term expectations, the central bank may be forced to act more decisively.