Inflation in the 20-nation euro zone fell to 2.5% in June but remains above the level desired by the European Central Bank (ECB), which is in no rush to cut interest rates further after its first tentative cut.
Tuesday’s figure was down from 2.6% in May – good news as inflation continues to fall from a peak of 10.6% that sapped consumers’ purchasing power and plunged Europe’s economies to near-zero growth for months.
But key indicators on Tuesday remained at levels suggesting inflation is likely to remain stuck between 2% and 3% for some time yet.
European Central Bank President Christine Lagarde attends a press conference after the ECB’s Governing Council meeting in Frankfurt (Michael Probst/Associated Press)
Services price inflation remained unchanged from the previous month at 4.1%.
Central banks do not want to realize too late that inflation is more persistent than expected and then reverse course — a mistake that would make it harder to squeeze inflation out of the economy and undermine the central bank’s credibility.
Higher interest rates are intended to keep inflation in check by making it more expensive to borrow money to buy goods and invest in new factory equipment.
This will ease pressure on prices but could also slow growth.
The ECB is walking a tightrope between controlling inflation without plunging the economy into recession.
European Central Bank (ECB) President Christine Lagarde said in a speech on Monday that the bank must first ensure that inflation is firmly under control before lowering interest rates again, after first cutting them by 0.25 percentage points at its June 6 meeting to the current 3.75%.
“It will take time to have sufficient data to be confident that the risks of above-target inflation have passed,” Lagarde said in a speech at the European Central Bank’s meeting in Sintra, Portugal.
He said euro zone growth was uncertain but the job market remained strong with low unemployment.
That’s a sign the economy is holding up, even though interest rates are much higher than they used to be.
Still, rising interest rates are weighing on credit-sensitive sectors such as real estate and construction.
Mortgage rates for homebuying have risen, bringing an end to years of rising house prices in the eurozone.
But depositors are feeling the relief from a previous period of zero interest rates when some banks charged negative interest rates on deposits — in other words, charged depositors a fee for keeping their money.
Lagarde said the first rate cut in June would only “ease the level of restrictions” on the economy and not be the start of a rapid series of cuts.
She said decisions will be made based on data coming in at each meeting.
Analysts say a rate cut is unlikely at the central bank’s meeting on July 18 and discussions on interest rates will remain focused on the central bank’s September meeting.
The European economy suffered near-zero growth every quarter, before picking up a modest 0.3% gain in the first three months of the year.
Recent indicators such as the S&P Global Purchasing Managers’ Index suggest that euro zone factory activity is contracting.
Rising energy prices have caused inflation that has robbed consumers of purchasing power and slowed the European economy, but consumers are finally regaining that power through new labor agreements and wage increases.
Energy prices soared after Russia all but cut off natural gas supplies during its full-scale invasion of Ukraine, spreading to other goods and services, from medical bills and concert tickets to haircuts and restaurant bills.
