Eurozone inflation falls to 2.5% making interest rate cuts more likely 

Following a brief uptick in May, the annual inflation rate in the eurozone dropped to 2.5% in June, meeting economists’ predictions and fueling optimism for possible interest rate cuts by the European Central Bank (ECB). 

According to estimates from Eurostat, the index of consumer prices in the eurozone increased by 2.5% year-on-year in June, slightly down from 2.6% in May. Month-on-month, inflation grew by 0.2%, consistent with the previous month.

Belgium saw persistently high inflation in June, with the annual harmonised rate hitting 5.5%, the highest since August 2023. Monthly inflation in Belgium rose by 0.5%. 

The Netherlands also experienced an inflation rise from 2.7% to 3.5%, the highest level since August 2023. Italy’s inflation edged up from 0.8% to 0.9% year-on-year, and Finland’s from 0.4% to 0.6%, both remaining below the eurozone average. Latvia’s inflation increased from 0% to 1.4%, and Lithuania’s from 0.9% to 1%.

In Germany, harmonised consumer prices rose by 2.5% compared to June 2023, down from the previous 2.8% rate. France’s inflation also eased from 2.6% to 2.5% year-on-year. Core inflation, which excludes food and energy, decreased from 2.9% in May to 2.8% in June, aligning with market expectations.

Among the main components of euro area inflation, services maintained the highest annual rate at 4.1%, unchanged from May. Food, alcohol, and tobacco decreased slightly to 2.5% from 2.6% in May; non-energy industrial goods remained stable at 0.7%; and energy dipped to 0.2% from 0.3% in May.

Traders have marginally increased the probability of an ECB rate cut in September, now estimated at 86%. Market expectations suggest a total of 44 basis points in rate cuts by year-end, indicating nearly two additional policy adjustments by the ECB.

The euro fell by 0.2% against the dollar to 1.0716, poised to end a three-session gain streak. Eurozone sovereign yields remained mostly steady following the inflation data, with the 2-year Schatz yielding 2.90%. 

European stocks declined this week, with the Euro Stoxx 50 down over 1% by 11:20 am CET. The German DAX and French CAC 40 indices saw similar drops, while Madrid’s IBEX 35 fell by 1.4%, reflecting poor risk sentiment. Among the largest 50 European stocks, Munich RE, Bayer, and Banco Santander were the biggest losers, dropping by 3.9%, 2.9%, and 2.8%, respectively.

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