Eurozone inflation slows to 2.5% in June, boosting ECB rate cut hopes

A man walks on a map showing the countries of the Eurozone in the hallway of the European Central Bank in Frankfurt, Germany

Following a brief rise in May, the annual inflation rate in the eurozone eased in June, aligning with economists' expectations and bolstering hopes for potential interest rate cuts by the European Central Bank (ECB).

The harmonised index of consumer prices in the eurozone rose by 2.5% year-on-year in June, a slight decline from the 2.6% recorded in the previous month, according to preliminary estimates from Eurostat released on Tuesday. On a monthly basis, inflation advanced by 0.2%, maintaining the same pace as in May.

Examining the main components of euro area inflation, services had the highest annual rate in June at 4.1%, unchanged from May. This was followed by food, alcohol, and tobacco at 2.5%, slightly down from 2.6% in May; non-energy industrial goods at 0.7%, stable compared to May; and energy at 0.2%, down from 0.3% in May.

Excluding food and energy, core inflation eased from 2.9% year-on-year in May to 2.8% in June, in line with market expectations.

Belgium's inflation hits 10-month high, while Germany sees fall

Among eurozone members, Belgium experienced stubbornly high inflation in June, with the annual harmonised rate reaching 5.5%, the highest since August 2023. On a monthly basis, inflation in Belgium accelerated at a 0.5% pace.

The Netherlands also saw inflation rise from 2.7% to 3.5%, reaching the highest level since August 2023. Other countries witnessing inflation increases included Italy, up from 0.8% year-on-year to 0.9%, and Finland, up from 0.4% to 0.6%, although still well below the bloc's average. Additionally, Latvia saw inflation rise from 0% to 1.4%, and Lithuania from 0.9% to 1%.

In Germany, harmonised consumer prices rose by 2.5% compared with June 2023, marking a reduction from the previous 2.8% rate. France's inflation slowed from 2.6% year-on-year to 2.5%.

ECB's job not yet done, Lagarde says

The European Central Bank's efforts to combat inflation are "not done," and policymakers must stay alert, President Christine Lagarde stated on Monday.

Speaking ahead of the central bank's Forum on Monetary Policy at Sintra, Lagarde mentioned that recent policy actions have helped stabilise inflation expectations, with inflation anticipated to return to 2% sustainably in the second half of 2025.

"We are still facing several uncertainties regarding future inflation", Lagarde warned, adding that it will require time for policymakers to collect enough data to be confident that the risks of inflation exceeding the target have been mitigated.

Drawing a comparison to the late footballer and manager Sir Bobby Robson, Lagarde stressed, "the first 90 minutes are the most important". Similarly, she asserted: "We will not rest until the match is won and inflation is back at 2%."

Market reactions

Traders have marginally raised the likelihood of an ECB rate cut in September, now estimated at 86%. Market participants are forecasting a total of 44 basis points in rate cuts by the end of the year, suggesting nearly two additional policy adjustments by the ECB.

The euro declined by 0.2% against the dollar to 1.0716, poised to end a three-session streak of gains. Eurozone sovereign yields remained largely unchanged following the inflation data, with the 2-year Schatz trading at a 2.90% yield. On Monday, sovereign yields experienced a sharp rise, with the Bund adding 10 basis points to reach 2.60%, driven by a combination of rising oil prices and political uncertainties in both Europe and the US.

European stocks fell on Tuesday, with the Euro Stoxx 50 down over 1% by 11:20 am CET. Both the German DAX and French CAC 40 indices saw similar declines. Madrid lagged behind, with the IBEX 35 falling 1.4%, reflecting poor risk sentiment.

Munich RE, Bayer, and Banco Santander were the laggards among the largest 50 European stocks, dropping by 3.9%, 2.9%, and 2.8%, respectively.