Eurozone inflation drops to 2.8%, lifting pressure on ECB
A sharper-than-expected drop in eurozone inflation to 2.8% in June has eased pressure on the European Central Bank to raise interest rates further, dragging bank shares lower.
Eurozone inflation fell to 2.8% in June, down from 3.2% in May and beating economist expectations of 3.0%. Prices actually declined by 0.1% over the month, marking the first monthly drop this year. The core rate, which strips out volatile energy and food costs, also slipped to 2.4% from 2.6%.
The cooldown was driven by a rapid reversal in energy costs. While energy remains the largest contributor to inflation at 8.7%, that is down sharply from 10.8% in May. The decline follows a ceasefire between the US and Iran and the reopening of the Strait of Hormuz. Services inflation fell to 3.2%, while food, alcohol and tobacco slowed to 1.6%.
The relief was not evenly distributed across the bloc. Germany’s harmonised rate dropped to 2.4% as energy inflation more than halved, while France fell to 2.0% as fuel costs retreated. At the other end of the spectrum, Lithuania topped the bloc at 5.5% and Bulgaria recorded 5.3%. Italy was an outlier among the major economies, easing only to 3.1%, because its regulated household energy tariffs lag behind wholesale markets and continued to climb.
Economists attribute the broader slowdown as much to economic weakness as to geopolitical developments. Joe Nellis, economic adviser at MHA, pointed to cautious household spending and business investment acting as a brake on prices. "Put simply, the Eurozone economy is not generating enough momentum to drive prices higher at any great pace," he said.
Financial markets immediately priced in a reduced threat of aggressive monetary tightening. The euro slipped below $1.14, and the Euro STOXX Banks index lost around 0.7%. BNP Paribas fell 1.2% and Société Générale dropped 0.8%. Banks typically suffer when the outlook for higher interest rates dims.
Nellis expects the ECB to adopt a cautious stance when its Governing Council meets in July. While he noted a single hike to 2.5% remains possible, he added: "With the economy weak and inflation appearing manageable, the ECB will be wary of adopting a significantly more restrictive monetary policy stance."
