Eurozone inflation eases but ECB likely to keep interest rates on hold

Inflation across the eurozone slowed to 2.5% in June despite lingering pressure on households from price increases in the service sector, leaving the European Central Bank on track to keep interest rates on hold this month.

Annual inflation in consumer prices across the 20-country bloc eased from 2.6% in May, according to a flash estimate from the EU statistical agency Eurostat, matching financial market expectations.

However, core inflation – which strips out food, energy, alcohol and tobacco – remained unchanged at 2.9%, marginally higher than predicted by economists in a reflection of stubborn inflationary pressures.

Analysts said the figures were unlikely to encourage the ECB to cut interest rates again at its next policy meeting on 18 July, after it became the first big global central bank to reduce official borrowing costs, in June.

“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,” said Bert Colijn, the senior eurozone economist at the Dutch bank ING.

“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.”

In its flash estimate for June, Eurostat figures showed services had the highest annual inflation rate at 4.1%, a stable rate compared with May. Annual price growth for food, alcohol and tobacco slowed from 2.6% in May to 2.5%.

Riccardo Marcelli Fabiani, a senior economist at the consultancy Oxford Economics, said: “Inflation resumed its descent after it had been temporarily interrupted in May, and it will continue to fall as inflationary pressures wane thanks to easing wage growth, lower energy prices and normalised price expectations. But core inflation remaining stable reminds us that the disinflationary process will be bumpy.”

The ECB cut its main deposit rate last month to 3.75% from a record high of 4%, putting it ahead of the US Federal Reserve and the Bank of England, which have yet to cut interest rates. It was the first time that the main eurozone interest rate had been reduced in almost five years.

However, the central bank’s president, Christine Lagarde, said on Monday that benign economic developments suggest that further interest rate cuts are not urgent, with a robust labour market and resilient wage growth.

The latest figures come 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.

Pierre Roke, a senior analyst at Validus Risk Management, said rising political uncertainty and inflationary pressures could force the ECB to keep rates on hold for longer than anticipated in financial markets, where traders are poised for a second rate cut in September.

A second rate cut “feels ambitious”, he said. “We certainly see higher rates as a bigger risk from here than lower.”