Eurozone inflation slows to 2.5% in June, boosting ECB rate cut hopes

Eurozone inflation slows to 2.5% in June, boosting ECB rate cut hopes
Eurozone inflation slows to 2.5% in June, boosting ECB rate cut hopes

Eurozone inflation fell to 2.5% in June, in line with expectations. Inflation in Belgium reached its highest level in 10 months, while it fell in Germany.

After a brief rise in May, the eurozone’s annual inflation rate fell in June, in line with economists’ expectations and boosting hopes of possible interest rate cuts by the European Central Bank (ECB).

The euro area’s harmonised index of consumer prices rose by 2.5% year-on-year in June, down slightly from 2.6% the previous month, according to preliminary estimates from Eurostat published on Tuesday. Month-on-month inflation rose by 0.2%, maintaining the same pace as in May.

Looking at the main components of euro area inflation, services recorded the highest annual rate in June, at 4.1%, unchanged from May. This was followed by food, alcohol and tobacco, at 2.5%, down slightly from 2.6% in May; industrial goods excluding energy, at 0.7%, unchanged from May; and energy, at 0.2%, down from 0.3% in May.

Excluding food and energy, core inflation fell from 2.9% year-on-year in May to 2.8% in June, in line with market expectations.

Inflation in Belgium hits 10-month high, falls in Germany

Among eurozone members, Belgium experienced stubbornly high inflation in June, with the harmonised annual rate reaching 5.5%, the highest since August 2023. On a monthly basis, inflation in Belgium accelerated to a pace of 0.5%.

The Netherlands also saw its inflation rise from 2.7% to 3.5%, reaching its highest level since August 2023. Other countries that saw inflation rise include Italy, which rose from 0.8% year-on-year to 0.9%, and Finland, which rose from 0.4% to 0.6%, although still well below the bloc average. Additionally, Latvia saw its inflation rise from 0% to 1.4%, and Lithuania from 0.9% to 1%.

In Germany, harmonised consumer prices rose by 2.5% compared to June 2023, down from the previous rate of 2.8%. In France, inflation slowed from 2.6% to 2.5% year-on-year.

ECB has not yet completed its mission, says Christine Lagarde

The European Central Bank’s efforts to fight inflation are “not over” and policymakers must remain vigilant, President Christine Lagarde said Monday.

Speaking ahead of the central bank’s Monetary Policy Forum in Sintra, Lagarde said recent policy measures have helped stabilise inflation expectations, with inflation expected to return sustainably to 2% in the second half of 2025.

“We still face several uncertainties about future inflation,” Lagarde warned, adding that it will take time for policymakers to collect enough data to be confident that the risks of inflation overshooting the target have been mitigated.

Drawing a comparison with the late footballer and manager Sir Bobby Robson, Christine Lagarde stressed that “the first 90 minutes are the most important”. Similarly, she said: “We will not rest until the game is won and inflation is back to 2%.”

Market reactions

Traders have slightly increased the probability of an ECB rate cut in September, now estimated at 86%. Market participants are forecasting a total of 44 basis points of rate cuts by the end of the year, suggesting about two more adjustments to the ECB’s monetary policy.

The euro fell 0.2% against the dollar to 1.0716, on track to end a three-session rally. Eurozone sovereign yields were largely unchanged after the inflation data, with the 2-year Schatz trading at a yield of 2.90%. Sovereign yields rose sharply on Monday, with the Bund gaining 10 basis points to 2.60%, driven by a combination of rising oil prices and political uncertainty in Europe and the United States.

European stocks fell on Tuesday, with the Euro Stoxx 50 down more than 1% by 11:20 CET. Germany’s DAX and France’s CAC 40 both posted similar declines. Madrid lagged, with the IBEX 35 down 1.4%, reflecting weak risk sentiment.

Munich RE, Bayer and Banco Santander were the laggards among the 50 largest European stocks, falling 3.9%, 2.9% and 2.8% respectively.

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