Good news! European Inflation Eases In June – ECB Rate Cuts Focus?


Inflation in the European zone of 20 countries eased slightly to 2.5% in June, but still remained above the level targeted by the European Central Bank. At the same time the ECB appears to be in no rush to add more rate cuts after a cautious initial reduction in its reference rate.

The figure released on Tuesday was down from 2.6% in May, which was good news as inflation continued to decline from a peak of 10.6% that sapped consumer purchasing power and hampered the European economy.

However, key indicators on Tuesday remained at levels that suggest inflation may remain between 2% and 3% for a while. Inflation in service prices remained at 4.1%, unchanged from the previous month.

The ECB's vigilance is in keeping inflation under control as the U.S. Federal Reserve postpone rate reductions from current highs. High rates aim to reduce inflation by making it more expensive to borrow money to buy goods or invest in new factory equipment. This relieves pressure on prices but can also depress growth. On that basis is the balance that the ECB and the Fed are trying to achieve: keeping inflation under control without pushing their economies into recession.

ECB President Christine Lagarde said in a speech on Monday that the bank must first ensure inflation is under control before cutting the key rate again after the first quarter-point reduction at the June 6 meeting to the current rate of 3.75%.

Lagarde described the first rate cut in June as merely "reducing the level of restrictions" on the economy and not the start of a rapid series of cuts. He said the decision will be based on the data that comes in at each meeting.

Analysts see no cut expected at the bank's meeting on July 18, meaning talks on rates remain focused on the bank's meeting in September.