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Eurozone inflation slowed to 2.5% in June, but policymakers will remain concerned about strong increases in services prices that partially offset slowing growth in energy and fresh food. .
The figure for the year to June slowed from 2.6% in the previous month. This was in line with the 2.5% forecast of economists polled by Reuters.
If price rises slow in the 20 countries that share the euro after accelerating in May, it will provide some comfort to the European Central Bank, which began cutting interest rates last month and vowed to hit its 2% target for inflation by next year. Probably.
However, rate setters will continue to be concerned about service inflation, which remains high. Prices in the sector rose 4.1% in the year to June, matching the seven-month high recorded in May, data released by the EU’s statistics office on Tuesday showed.
Economists say the figures are likely to prompt the ECB to keep the benchmark deposit rate unchanged at 3.75% at its next Governing Council meeting on July 18, and further cuts in borrowing costs will depend on how quickly services inflation falls. He said that there is a possibility that
“The fact that service inflation, which is most sensitive to domestic economic conditions, has remained high this year gives the ECB more reason to be cautious,” said Jack Allen Reynolds at Capital Economics.
Diego Iscaro of S&P Global Market Intelligence said he expects the ECB to “keep interest rates on hold at its meeting later this month.” He expected two more rate cuts in September and December this year, but added: “If core inflation does not ease in the coming months, this outlook will be called into question.”
Eurostat said energy inflation slowed to 0.2% in June from 0.3% in May, while unprocessed food prices fell to 1.4% in June from 1.8% in May. announced that it had decreased.
Core inflation, which excludes energy and food to better gauge underlying price pressures, remained unchanged at 2.9%.
In addition to a series of major sporting and cultural events, the start of the summer tourist season is expected to increase prices for many services in high demand in Europe, such as hotel rooms and airline tickets.
ECB President Christine Lagarde said high uncertainty about “how the relationship between profits, wages and productivity will change, and whether the economy will experience new supply-side shocks” will keep inflation under control. “It will take time” to determine whether the .
“A strong labor market means it will take time to gather new information, but growth will continue to grow,” Lagarde said in her opening speech at the ECB’s annual meeting in Sintra on Monday night. “We also need to be mindful of the fact that the outlook remains uncertain.” ,Portugal.
Separate data released by Eurostat on Tuesday showed the euro zone’s unemployment rate remained at an all-time low of 6.4% in May. The number of unemployed people in the region increased by 38,000 to 11.1 million.
ECB policymakers are also keeping an eye on the risk of political turmoil in France following the victory of Marine Le Pen’s far-right National Party in the first round of French parliamentary elections.
Investors have speculated that the ECB could be asked to intervene by buying French government bonds if financial markets fall sharply as a result of the election. The final election will be held on July 7th.
However, ECB Vice-President Luis Deguindos sounded optimistic about the market reaction, saying that it was not “disorderly” and mainly indicated that investors were reacting to potential changes in fiscal policy. He said there was.
“The situation is under control,” he told Bloomberg TV on Tuesday.
