Eurostat’s final figures, published on Friday, showed annual inflation easing from 3.2% in May to 2.8% in June, the first decline since prices began accelerating in January, less than a week before the ECB’s Governing Council announces its policy decision on Thursday and decides whether June’s first interest-rate hike in nearly three years should be followed by another increase.
The details of the release lean towards a pause.
Core inflation, which strips out energy, food, alcohol and tobacco, slowed from 2.6% to 2.4%, energy inflation cooled from 10.8% to 8.5% and services eased from 3.5% to 3.2%, with the headline rate falling in 22 of the EU’s 27 member states.
Among the eurozone’s big four economies, Germany stood at 2.4%, France at 2%, Italy at 3% and Spain at 3.6%.
The numbers matter because of what came before.
In June, the ECB lifted its deposit facility rate from 2% to 2.25%, its first increase in nearly three years, after the war in Iran drove eurozone inflation to 3.2% in May, the highest reading since September 2023.
A reignited Iran war
The complication is that the shock behind that hike has returned.
Oil neared $120 a barrel in March before sliding to around $72 following an interim peace agreement at the end of June, but the truce has frayed badly this month.
The US and Iran have exchanged fresh strikes, Tehran has attacked ships and threatened regional energy exports, and Washington has reimposed sanctions and stepped up its naval blockade, pushing Brent crude back up to $87 a barrel on Friday.
That resurgence has revived the possibility of a surprise hike on Thursday, according to ING, although the bank still expects a hold, with a second increase more realistic in September.
Renewed conflict involving Iran
The complication is that the shock behind that June rate hike has returned.
Oil prices neared $120 a barrel in March before sliding to around $72 following an interim peace agreement at the end of June. However, the truce has frayed badly this month.
The United States and Iran have exchanged fresh strikes, Tehran has attacked commercial shipping and threatened regional energy exports, while Washington has reimposed sanctions and tightened its naval blockade, pushing Brent crude back up to $87 a barrel on Friday.
The renewed escalation has revived the possibility of a surprise rate hike on Thursday, according to ING, although the bank still expects the ECB to hold rates steady, viewing a second increase as more likely in September.
July is also not a forecasting meeting, giving policymakers cover to wait for updated economic projections before taking further action.
What Lagarde has signalled
Speaking at the ECB’s Sintra forum a few weeks ago, ECB President Christine Lagarde insisted June’s rate hike was not an “insurance hike” but a response to a genuine inflation problem. She noted that the ECB’s projections showed inflation returning to its 2% target only in late 2027, and only if monetary policy was tightened further.
Lagarde also refused to pre-commit to a policy path, saying “forward guidance is not in the cards” and that decisions would continue to be made on a meeting-by-meeting basis, guided by incoming economic data.
The ECB remains the only major Western central bank to have actually pulled the trigger.
The US Federal Reserve left its benchmark interest rate unchanged at 3.50%-3.75% in June, at Kevin Warsh’s first meeting as chair, although his hawkish tone unsettled markets.
The Bank of England also left its Bank Rate unchanged at 3.75% in a 7-2 vote, with two policymakers preferring an increase to 4.0%, while the Bank of Japan raised its policy rate to a 31-year high of 1.0%.