Even though inflation dropped to 2.5% in the 20-member eurozone last month, the European Central Bank (ECB) has deemed it insufficient to justify further cuts to its lowered benchmark rate for now. Data released on Tuesday show the June inflation rate was down by 0.1% compared to May, evidence that inflation in Europe continues to decline from the 10.6% high that inflicted months of near-stagnant growth on the eurozone economy.
The latest indicators suggest that inflation could hover between 2% and 3% for the time being. Service industry prices at plus-4.1% remain unchanged from the previous month.
The ECB’s drive to keep inflation under control coincides with the U.S. Federal Reserve’s efforts to hold off on cutting its rates.
Central banks are wary of easing up lest inflation flares up anew forcing them to reverse course. By sticking to a policy of high rates, the banks seek to bring inflation under control, making it more expensive to borrow money to buy goods or invest in new manufacturing equipment. The risk is that their approach can slow down growth. Both the ECB and the US Fed must avoid pushing their economies into recession.
Addressing an ECB conference in Portugal on Monday, ECB President Christine Lagarde said the bank had to ensure that inflation was firmly under control before it could cut its key rate again after it was reduced to the current 3.75% in early June. Time was needed to gather sufficient data to be sure “that the risks of above target inflation have passed,” she declared. While growth in the eurozone was uncertain, the jobs market remained strong, a sign that the economy is holding up even with rates much higher than before, she said.
Lagarde described the first rate cut as “moderating the level of restriction” on the economy, cautioning that it should not be seen as a sign of a rapid series of cuts to come. Decisions would be based on incoming data on a meeting-to-meeting basis, she added.
Analysts suggest that the next discussion about rates is likely to happen at the bank’s September meeting.
The European economy has struggled through a period of near-zero growth, with a modest upturn of 0.3% in the first quarter of 2024. Recent indicators show that manufacturing activity in the eurozone is contracting. Higher energy prices impacted consumer purchasing power, a setback only now being offset by new labour agreements and pay increases. Energy prices soared after Russia cut off most supplies of natural gas over its full-scale invasion of Ukraine.
