FRANKFURT, Germany (AP) — Inflation in the 20-nation euro zone fell to 2.5% in June but remains above the level desired by the European Central Bank, which is in no rush to cut interest rates further after its first tentative cut.
While Tuesday's figure was down from 2.6% in May, it is good news as inflation continues to fall from a peak of 10.6% that sapped consumers' purchasing power and plunged Europe's economies into near-zero growth for months.
But key indicators on Tuesday remained at levels suggesting inflation may remain stuck at 2% to 3% for some time yet. Services price inflation was 4.1%, unchanged from the previous month.
The ECB is being cautious about containing inflation because the U.S. Federal Reserve is reluctant to cut interest rates from their current high levels. The central bank does not want to reverse course only to discover too late that inflation is more persistent than expected. Such a mistake would make it even harder to squeeze inflation out of the economy and would also undermine the central bank's credibility.
Higher interest rates are intended to keep inflation down by making it more expensive to borrow money to buy goods and invest in new factory capacity. That reduces price pressures, but it can also slow growth. The ECB and Fed are walking a tightrope between ensuring inflation is kept down 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 well under control before lowering interest rates again, after first cutting them by a quarter of a percentage point at its June 6 meeting to the current 3.75%.
“It will take time to have enough data to be confident that the risks of above-target inflation have passed,” Lagarde said in a speech at a European Central Bank conference in Sintra, Portugal. While euro zone growth is uncertain, she said the job market remains strong with low unemployment — a sign the economy is holding up even at interest rates much higher than before.
Still, rising interest rates are holding back credit-sensitive sectors like real estate and construction. Mortgage rates for homebuyers have risen, ending years of house price growth in the euro zone. But savers are feeling a sense of relief from a previous period of zero interest rates when some banks charged negative interest rates on savings — that is, fees for depositors to keep their money on the line.
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 series of rapid rate cuts. She said decisions would be made based on incoming data at each meeting.
Analysts say a rate cut is unlikely at the central bank's July 18 meeting and that discussions on interest rates will remain focused on the central bank's September meeting.
The European economy has struggled with near-zero quarterly growth, rising just 0.3% in the first three months of the year, and recent indicators such as S&P Global's Purchasing Managers' Index have shown that factory activity in the euro zone is shrinking.
The European economy slowed as rising energy prices sapped consumer purchasing power and consumers are only now regaining it through new labor agreements and wage increases. Energy prices soared when Russia invaded Ukraine and all but cut off natural gas supplies, and the increase has spilled over into other goods and services, including everything from medical bills and concert tickets to haircuts and restaurant bills.
