Eurozone inflation slowed more than analysts expected in June. One of the factors was a decline in global oil prices after hopes emerged for a peace settlement in the Middle East.
According to Eurostat, consumer prices rose 2.8% year-on-year in June after increasing 3.2% a month earlier. This was below the median forecast of analysts surveyed by Bloomberg, who had expected inflation at 3%, Bloomberg writes.
Core inflation, which excludes volatile categories such as food and energy, also slowed more than expected. The closely watched services inflation gauge fell to 3.2%.
Waiting for the ECB’s next move
Despite the slowdown in inflation, money markets still see more than a 50% chance that the European Central Bank will raise rates by 25 basis points by September. A full rate hike is almost priced in by the end of the year.
German government bonds pared their losses after the data was released. The yield on 10-year German bonds rose by 2 basis points to 2.88%, although it had earlier climbed to 2.90%.
The ECB is now assessing whether its June rate increase, the first since 2023, will be enough to contain the inflationary pressure linked to the U.S. war with Iran. Earlier data had already shown weaker-than-expected consumer price growth in the eurozone’s three largest economies. In France, inflation even returned to the ECB’s 2% target.
Regulators remain cautious
Despite the improved data, ECB officials are in no hurry to declare victory over inflation. They warn that the impact of higher oil and natural gas prices following the outbreak of fighting may appear with a delay.
ECB Chief Economist Philip Lane said the regulator needs to monitor how the increase in energy costs in recent months will feed into food and services inflation.
Bloomberg Economics believes that weaker inflation data and lower oil prices weaken the case for another rate hike. David Powell, senior euro-area economist, noted that if oil prices remain lower, price growth likely peaked in May. According to him, even if ECB President Christine Lagarde still supports a rate hike in September, it would most likely be the last one in this short tightening cycle.
Bundesbank President Joachim Nagel also took a cautious stance. In an interview with Bloomberg Television at the ECB forum in Sintra, he said he was surprised by the decline in oil prices, but the future development of the situation in the Middle East remains uncertain.
“I will keep all options open for the July and September meetings,” Nagel said. According to him, the outcome of the rate discussion remains open.
Markets still expect further monetary tightening, but they are pricing in a less aggressive scenario. The cooling of energy markets has reduced the risk of the harshest scenarios that the ECB had previously considered for Europe’s economy.
Earlier, we wrote that inflation in the eurozone is forcing the ECB to continue discussing an interest rate hike.
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