BRUSSELS, June 2 - Inflation in the euro zone fell just below the European Central Bank's two percent target in May while the economy remained sluggish, days before the ECB is expected to cut interest rates. The official price data issued on Monday came as the European Commission reported a slight worsening in economic sentiment in May and a drop to a 15-month low in the EU executive's business climate indicator.
"Both of today's surveys reinforce the case for a rate cut on Thursday," said Jodie Saul, assistant economist at CIBC World Markets in London. European Union statistics office Eurostat said its early inflation estimate for May was 1.9 percent after 2.1 percent in April. It was the first time since June 2002 that the inflation rate came in below two percent. Expectations of a rate cut have grown against the backdrop of data highlighting the sluggishness of the euro zone economy and the euro's recent surge on the foreign exchanges, which is seen curbing price pressures.
This data included European Commission figures for business and consumer confidence, also released on Monday. Overall economic sentiment for May slipped to 98.0 from 98.1, consumer confidence slipped to minus 20 from minus 19 and industrial confidence edged down to minus 13 from minus 12.
The 15-month low in the Commission's euro zone business climate indicator was minus 0.68 in May, although the decline followed a sharp upward revision to April data. April's reading was revised to minus 0.54 from a previously reported figure of minus 0.70. The May reading was the lowest since February 2002, when the business climate indicator hit minus 0.86.
Earlier, the Purchasing Managers' Index for manufacturing had shown contraction in manufacturing activity last month as exports buckled under the weight of the strong euro. Fifty-four out of 57 economists polled by expect the ECB to cut its key refinancing rate on Thursday.//