Despite lingering pressure on households from rising services sector prices, inflation across the euro zone slowed to 2.5 percent in June, and the European Central Bank is expected to keep interest rates on hold this month.
Annual consumer price inflation across the EU20 fell from 2.6 percent in May, according to a preliminary estimate from Eurostat, the European Union's statistics office, and was in line with financial market expectations.
However, core inflation, which excludes food, energy, alcohol and tobacco, remained unchanged at 2.9%, slightly above economists' expectations, reflecting persistent inflationary pressures.
Analysts said the figures were unlikely to prompt the ECB to cut interest rates again at its next policy meeting on July 18 after it became the first major global central bank to cut its official borrowing costs in June.
“These figures give no reason for the ECB to cut rates again in July,” said Bert Collin, senior euro zone economist at Dutch bank ING. “The ECB will likely wait eagerly for data over the summer before seriously discussing the next rate cut in September.”
“Summer is going to be relatively boring. [for the ECB]With core inflation too high and the labor market strength, the Fed can afford not to cut rates further and will simply wait for more data on wages, inflation, and growth. It could also wait to see how the market turmoil surrounding the French election plays out.”
Eurostat's preliminary June figures showed annual inflation in the services sector was the highest at 4.1%, unchanged from May, while annual price increases for food, alcohol and tobacco slowed to 2.5% from 2.6% in May.
“Inflation is trending down again after a brief pause in May and will continue to fall as inflationary pressures ease on the back of slowing wage growth, lower energy prices and a normalization of price expectations. But the stabilization of core inflation is a reminder that the de-inflation process will be difficult,” said Riccardo Marcelli Fabiani, a senior economist at consultancy Oxford Economics.
The European Central Bank cut its key deposit rate to 3.75% last month from a record 4%, outperforming the U.S. Federal Reserve and the Bank of England, which have yet to cut rates. It was the first cut in the euro zone's main interest rate in nearly five years.
But central bank Governor Christine Lagarde said on Monday that favorable economic conditions suggested a strong labor market and stable wage growth meant further rate cuts were not urgent.
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The latest data came as European stocks fell to their lowest level in two weeks on Tuesday due to concerns over the outcome of the French election and growing economic uncertainty across the euro zone.
Pierre Roques, senior analyst at Validus Risk Management, said growing political uncertainty and inflationary pressures could force the ECB to keep rates on hold for longer than expected, even as traders in financial markets expect a second rate cut in September.
He said a second rate cut was “overly ambitious” and that “we see a greater risk of interest rates going up than down going forward.”
