Inflation in the Eurozone slowed in June, nearing the European Central Bank (ECB) target of 2%. Consumer prices rose 2.5% year-on-year, compared to 2.6% in May, matching the expectations of economists surveyed by Bloomberg. A measure excluding volatile items like food and energy unexpectedly remained unchanged at 2.9%.
After the quarter-point rate cut in June, ECB officials are examining whether inflation in the 20-nation currency union is falling sufficiently to justify further rate cuts. At the annual ECB retreat in Sintra, Portugal, President Christine Lagarde and Chief Economist Philip Lane expressed doubts that the threat of inflation has already been eliminated.
We still face multiple uncertainties," said Lagarde on Monday evening. "It will take time to gather enough data to be sure that the risks of inflation above the target are over.
These statements suggest that policymakers will take a break from lowering borrowing costs this month and wait until September, when new economic forecasts are available, to consider the next step. The markets are expecting one or two more steps this year – a scenario described as reasonable by council members such as Gediminas Simkus, Martins Kazaks, and Olli Rehn.
The robust labor market in the region gives the ECB time to assess the economy and the inflation outlook. According to a separate Eurostat report, the unemployment rate held at a record low of 6.4% in May.
This strength, however, contributes to sustained wage growth pressure, which remains a concern for the ECB, particularly in the services sector, where labor costs have a greater impact on prices than in manufacturing.
Lane emphasized that the ECB still had questions about the service sector and that the June data would not be sufficient to answer them. In fact, the service sector remained unchanged at 4.1% in June.
Jamie Rush and David Powell from Bloomberg Economics expect that the persistently high core inflation will make the ECB cautious about further interest rate cuts and that a rate cut in July is unlikely.
“What we definitely know is that the last kilometer—or mile—here in Europe will be bumpy and difficult,” ECB Governing Council member Simkus said to CNBC on Tuesday. “We had an increase in inflation in May. Now it has dropped a little.”
The ECB predicts that inflation will move sideways for most of 2024 as base effects drop out of the statistics. It expects significant movements towards the target next year and reaching the target by the end of 2025.
The Bloomberg Economics Nowcast for July, taking into account the latest data, indicates a value of 2.3% and accurately predicted the result for June.
On Tuesday afternoon, Lagarde will have another opportunity to comment on price developments and the path of monetary policy during a panel discussion, which will also feature Federal Reserve Chairman Jerome Powell and Roberto Campos Neto, the head of Brazil's central bank.
