Annual inflation in the euro area eased more sharply than expected in June, strengthening market expectations that the European Central Bank (ECB) will leave interest rates unchanged at its July policy meeting while assessing the trajectory of price pressures.
Official data showed inflation across the 20-member eurozone slowed to 2.8% in June from 3.2% in May, outperforming market expectations for a decline to 3.0%. The moderation was driven by slower increases in food, energy and services prices.
Core inflation, which excludes the more volatile food and energy components, also eased to 2.4% from 2.6% a month earlier, while services inflation fell to 3.2% from 3.5%.
The latest figures suggest inflationary pressures are gradually cooling, although headline inflation remains above the ECB's 2% medium-term target.
A recent decline in global oil prices, supported by hopes of easing geopolitical tensions in the Middle East, has helped reduce energy-related inflation risks and eased concerns over renewed price pressures.
According to the report, several ECB policymakers see little urgency to raise interest rates again at the central bank's July meeting, following the 25-basis-point increase delivered in June. Instead, officials are expected to monitor incoming economic data before deciding on the next policy move.
The ECB continues to closely watch the risk of so-called second-round effects, where higher energy costs feed into broader goods and services prices before translating into stronger wage growth.
However, recent data indicate those pressures have yet to materialize, with wage growth remaining broadly stable, reinforcing the case for keeping monetary policy unchanged in the near term.
Despite growing expectations of a July pause, many economists and investors still anticipate another ECB rate increase in September or October if inflationary pressures reaccelerate.
Markets remain cautious over the possibility of renewed volatility in oil and gas prices should geopolitical tensions in the Middle East intensify again. In addition, concerns persist that disruptions to fertilizer supplies from the region, combined with ongoing heatwaves across Europe, could weigh on agricultural production and push food prices higher later this year.
The ECB is scheduled to announce its next monetary policy decision on July 23, with investors looking for guidance on whether policymakers will extend their pause or leave the door open to additional tightening later in 2026.
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