Euro Zone Inflation Falls Sharply, Strengthening ECB's Patient Approach
Euro Zone Inflation Data and Implications for ECB Policy
Inflation Figures and Market Expectations
July 1 (Reuters) - Euro zone inflation eased last month far more than expected, further curbing pressure on the European Central Bank to raise interest rates again this month to offset quick price growth.
Overall inflation in the 21 nations sharing the euro currency slowed to 2.8% in June from 3.2% in May, coming well below expectations for 3.0%, as food, energy and services inflation all slowed.
Core Inflation and Services Sector Trends
A more closely watched figure on underlying prices, which filters out volatile food and fuel prices, meanwhile slowed to 2.4% from 2.6% as services inflation dropped to 3.2% from 3.5%.
Factors Influencing ECB's Approach
Oil Prices and Energy Market Developments
Although the June reading is still well above the ECB's 2% target, the recent decline in oil prices on bets for a peace deal has raised hopes that price pressures would ease from this point and the broader damage from the energy price surge would remain limited.
ECB Policymakers' Sentiment
Indeed, a host of policymakers, speaking on and off the record, have said that there is no rush for the bank to follow up June's quarter-point rate hike with another move this month and policymakers could afford some time to see how price pressures evolve.
Concerns Over Second-Round Effects and Wages
The ECB is especially worried that the initial energy shock will start pulling up the price of other goods and services, eventually lifting wages as well.
But such second-round price effects have yet to materialize and wage pressures are also not accelerating, boosting the case for patience.
Future Outlook and Potential Risks
Expectations for Further Rate Hikes
Still, the vast majority of economists and investors think that the ECB is likely to raise rates again in September or October, even if there is a pause in July.
Risks from Energy and Food Markets
This is because energy prices still remain far above pre-war levels and the Middle East conflict could take yet another unexpected turn, like many times before, keeping price expectations volatile.
There are also worries that the shortage of fertilizer from the Middle East and a European heatwave could reduce crop yields and put some upward pressure on food prices, lifting inflation just as energy costs are easing.
Upcoming ECB Policy Decision
The ECB next decides policy on July 23.
(Reporting by Balazs Koranyi; Editing by Kevin Buckland)
