FRANKFURT, Germany (AP) – Inflation in the 20-nation euro zone fell to 2.5% in June but remained above the level preferred by the European Central Bank, which added more after an initial tentative rate cut. There is no rush to cut interest rates. At benchmark rates.
The figure, released on Tuesday, was down from 2.6% in May, but comes as inflation continues to fall from a peak of 10.6%, robbing consumers of purchasing power and mitigating Europe’s economy with months of near-zero growth. This is welcome news as the situation continues to grow.
But key indicators on Tuesday remained at levels that suggest inflation could remain between 2% and 3% for some time. Service price inflation was 4.1%, unchanged from the previous month.
The ECB is being cautious about curbing inflation because the US Federal Reserve has decided not to cut interest rates from their current high levels. Central banks have belatedly realized that inflation is more stubborn than they thought and are unwilling to change course. This mistake would make it harder to squeeze inflation out of the economy and undermine the central bank’s credibility for bargain deals.
High interest rates are intended to reduce inflation by making it more expensive to borrow money to buy goods or invest in new factory equipment. This would reduce pressure on prices, but could also slow growth. That’s the tightrope the ECB and Fed are trying to walk. The idea is to ensure inflation is contained without pushing the economy into recession.
ECB President Christine Lagarde said in a speech on Monday that after cutting the key policy rate by a quarter of a percentage point for the first time to its current 3.75% at its June 6 meeting, it would first be necessary to ensure that inflation is under control before cutting it again. He said it is necessary to make sure that it is.
“It will take time to collect enough data to be confident that the risk of inflation exceeding target has passed,” Lagarde said in a speech at the ECB conference in Sintra, Portugal. He said that while growth in the euro area was uncertain, the job market remained strong with low unemployment. This is a sign that the economy is holding up even with much higher interest rates than before.
Still, rising interest rates are sluggishing demand in credit-sensitive sectors such as real estate and construction. Mortgage interest rates for home purchases have risen, bringing an end to years of rising house prices in the euro area. But savers feel they are emerging from the early zero-interest era, when some banks paid negative interest rates on savings, or in other words, charged people to keep their money.
Lagarde characterized the first interest rate cut in June as merely “easing the level of restrictions” on the economy and not the start of a rapid series of rate cuts. She says decisions are made based on the data received for each meeting.
Analysts say there is likely no rate cut at the central bank’s July 18 meeting, meaning interest rate discussions will remain focused on its September meeting.
Europe’s economy has been experiencing near-zero growth every quarter, with a modest 0.3% pick-up in the first three months of this year. Recent indicators such as the S&P Global Purchasing Managers Index show that factory activity in the euro area is contracting.
Europe’s economy slowed as inflation from soaring energy prices robbed consumers of purchasing power, but they are finally regaining it through new collective agreements and higher wages. After Russia cut off most of its natural gas supplies in a full-scale invasion of Ukraine, energy prices skyrocketed, and those price increases are reflected in the prices of other goods, from medical care and concert tickets to haircuts. This has spread to a wide range of categories of services. And the restaurant bill.
