Inflation gives ECB more time, and perhaps a reason to stop hikes

INFLATION GIVES ECB MORE TIME, AND PERHAPS A REASON TO STOP HIKES

The ECB raised rates last month to get ahead of an expected inflation bump due to the Iran war, but analysts and economists are split on whether they'll need to raise rates more following the latest inflation figures from the euro zone.

Overall inflation in the 21 nations sharing the euro currency slowed to 2.8% in June from 3.2% in May, coming well below expectations for 3.0%, as food, energy and services inflation all slowed.

"The substantial fall in headline inflation in the euro zone in June left it below the ECB’s forecast, and if energy prices remain around current levels it will fall again in July," writes Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

"This makes us more confident in our view that the ECB will not raise interest rates any further."

Others see inflation picking up again through the summer, although the figures today will buy the ECB some time and allow for a pause at the July meeting.

Here's Commerzbank:

"Although energy prices are likely to fall slightly, companies are expected to increasingly pass on their energy costs – which remain higher than they were before the start of the Iran war – to their customers, meaning that the indirect effects feared by the ECB will intensify for the time being," Commerzbank's senior economist Ralph Solveen says.

"The central bank is likely to respond to this with another interest rate hike in September."

Nordea is somewhere in the middle. Anders Svendsen and Tuuli Koivu think that today's figures should ease some inflation concerns, which lowers the chances of another hike in July, but that you can't rule out another increase down the line.

"It is much too early for the ECB to call off its inflation concerns, partly because it is too early to assess the extent of any second-round effects and partly because doing so would open up for criticism with regards to the June rate hike," Nordea's Svendsen and Koivu say.

Markets are pricing 23 basis points of tightening by year-end, implying around a 90% chance of one more hike.