Benign figures suggest euro zone inflation remains around target

By Balazs Koranyi

FRANKFURT (Reuters) -Euro zone inflation likely remained around the ECB's 2% target last month, a slew of national data indicated on Thursday, keeping pressure off policymakers to cut interest rates further after a year of rapid cuts in borrowing costs.

Inflation in the euro zone's biggest economies was at or near expectations in July, confirming the ECB's narrative that runaway price growth has been defeated and figures would be hovering near its target now, with risk between under and overshooting broadly balanced.

Inflation in Germany eased to 1.8% from 2.0%, coming below expectations for 1.9% while figures in Italy eased to 1.7% from 1.8%, above expectations for 1.6%.

Price growth in France was meanwhile unchanged at 0.9%, above expectations for 0.8% and Spanish inflation jumped to2.7% from 2.3%.

"Today's national preliminary CPI readings for July, combined with strong Spanish inflation published yesterday, signal that the euro zone is likely to track at the ECB target of 2% this month," Oxford Economics said in a note.

Added together, the figures suggest that the euro zone number, due out on Friday, would be around 1.9% or 2.0%, a benign reading that will not change the ECB's view that there is no hurry in moving rates again after halving them to 2% in the year to June.

The ECB is also keen to hold out until it gains more clarity on how the evolution of a global trade conflict will impact prices.

Tariffs, imposed by President Donald Trump on U.S. imports, are expected to weigh on prices for now since they slow global trade and economic growth, but a major realignment in corporate value chains could actually raise price pressures further out.

For now, the ECB sees inflation dipping under 2% in the coming months and projects an 18-month period of modest undershooting before price growth returns back to 2% in 2027.

This muted inflation picture and relatively resilient growth are why financial investors think the ECB is close to done cutting rates. Markets see less than a 50% chance of another rate cut this year and they have started to price in a hike towards the end of 2026.

Friday's euro zone inflation reading is also going to be influenced by Germany but figures from various German states showed only modest changes compared to the previous month.

Euro zone inflation is expected by policymakers to remain near 2% as still quick price growth in services will be offset by energy and goods prices.

The stronger euro and muted wage growth are also exerting some downward pressure on prices, enough to counter upward pressure from increased government spending on things like defence or infrastructure.

(Reporting by Balazs Koranyi; Editing by Susan Fenton and Giles Elgood)