Eurozone inflation slowed to 2.5% in June, despite ongoing pressure on households from rising service sector prices. This development keeps the European Central Bank (ECB) on course to keep interest rates on hold this month, according to analysts.
Annual inflation in consumer prices across the 20-country bloc eased from 2.6% in May, according to a flash Eurozone inflation estimate from the EU statistical agency Eurostat, largely matching financial market expectations.
However, core inflation — which excludes food, energy, alcohol, and tobacco — remained unchanged at 2.9%, slightly above economists' predictions, indicating that inflationary pressures remain stubborn.
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Analysts suggested that these figures are unlikely to encourage the ECB to cut interest rates again at its next policy meeting on July 18, after it became the first major global central bank to cut official borrowing costs in June.
The Swiss National Bank, Sweden's Riksbank, and the Bank of Canada have all notably cut interest rates in recent months, but markets have remained focused on the actions of the Federal Reserve, ECB, and Bank of England for monetary policy cues.
Bert Colijn, the senior eurozone economist at the Dutch bank ING, commented on the fresh Eurozone inflation data in a Tuesday column, saying “nothing” in the figures would make the bank consider a second straight rate cut this month:
“Nothing in these figures would make the ECB cut again in July, and we think it’ll be eagerly awaiting data over the summer before seriously debating a next rate cut in September.
The summer is set to be relatively boring [for the ECB]. It can afford not to carry out another rate cut based on the too-high core inflation reading and labour market strength, and will likely just await incoming data on wages, inflation and growth. It can also see how market turmoil around the French elections plays out”.
Eurostat's flash estimate for June revealed that services had the highest annual inflation rate at 4.1% — consistent with the rate seen in May's. Annual price growth for food, alcohol, and tobacco slowed from 2.6% in May to 2.5% in June.
The Guardian cited Riccardo Marcelli Fabiani, a senior economist at Oxford Economics, as saying:
“Inflation resumed its descent after being temporarily interrupted in May. It will continue to fall as inflationary pressures wane due to easing wage growth, lower energy prices, and normalized price expectations. However, core inflation remaining stable reminds us that the disinflationary process will be bumpy”.
Last month, the ECB cut its main deposit rate to 3.75% from a record high of 4%, placing it ahead of the U.S. Federal Reserve and the Bank of England, which have not yet cut interest rates. The move marked the first reduction in the main eurozone interest rate in almost five years.
However, ECB President Christine Lagarde said on Monday that benign economic developments suggest that further interest rate cuts are not urgent, given a robust labor market and resilient wage growth.
Lagarde has characterized the ECB’s first rate cut in June as merely “moderating the level of restriction” on the economy — and not as the start of a rapid series of cuts. She has also stressed that the bank’s decisions will be based on incoming data on a meeting-to-meeting basis.
The latest Eurozone inflation figures came as European stocks fell on Tuesday to the lowest level in two weeks, amid worries about the outcome of the French election and heightened economic uncertainty across the eurozone. France's CAC 40 index and Germany's DAX index were 0.41% and 0.8% down for the day at the time of writing.
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