In June, inflation in the 20-nation eurozone slowly fell to 2.5%, but it stayed above the level that the European Central Bank wants it to be. The ECB is not in a hurry to make any more interest rate cuts after lowering its benchmark rate tentatively last month.
The number released on Tuesday was lower than the 2.6% rate seen in May. This is good news because inflation is still going down from its high point of 10.6%, which made people unable to spend money and slowed down the European economy for months.
But on Tuesday, signs stayed in place that suggest inflation may stay between 2% and 3% for a while longer. The rate of inflation in prices in the service sector stayed the same from one month to the next at 4.1%.
At the same time that the U.S. Federal Reserve is not cutting rates from their current highs, the ECB is being careful to make sure that inflation is under control. The central banks don’t want to find out too late that inflation is more stubborn than they thought and have to change their plans. This would make it harder to get rid of inflation and hurt their credibility as well.
This is done by making it more expensive to borrow money to buy things or put money into new factory equipment. High rates are meant to stop inflation. That makes prices less volatile, but it can also slow down growth. That’s the fine line the ECB and the Fed are trying to walk: they want to keep inflation in check without sending their economies into recession.
In a speech on Monday, ECB President Christine Lagarde said that the bank needed to make sure that inflation was well under control before lowering its key rate again. This comes after the bank cut it by a quarter point at its meeting on June 6 to the current level of 3.75%.
Lagarde said at an ECB conference in Sintra, Portugal, “It will take time for us to gather enough data to be sure that the risks of above-target inflation have passed.” She said that even though it wasn’t clear how the eurozone would grow, the job market was still strong and unemployment was low. If rates are that high now, it means the economy is still doing well.
Still, areas that depend on credit, like real estate and construction, have been held back by higher rates. Mortgage rates for buying a house have gone up, and house prices in the eurozone have stopped rising after a years-long rise. But savers are glad that the time of zero interest rates is over. During that time, some banks paid negative interest on savings, which meant they charged people to keep their money in those accounts.
In June, Lagarde said that the first rate cut was just “moderating the level of restriction” on the economy and not the start of a fast series of cuts. She says that decisions will be made based on new information that comes in between meetings.
Analysts think that the bank will not lower interest rates at its meeting on July 18. This means that the September meeting is still the most important time to talk about rates.
Quarter after quarter, the European economy has grown by almost nothing. In the first three months of this year, it only grew by 0.3%. Recent signs, like S&P Global’s purchasing managers’ index, show that factory activity is decreasing in the eurozone.
Inflation caused by higher energy prices slowed down Europe’s economy. People lost the ability to buy things, which they are only now getting back through new labour agreements and pay raises. After Russia cut off most of Ukraine’s natural gas supplies as part of its full-scale invasion, energy prices went through the roof. These higher prices then spread to other goods and then to services, which include everything from haircuts and restaurant bills to medical care and concert tickets.
