ECB may maintain high interest rates

Higher-than-expected core inflation could make it easier for the ECB to decide on maintaining higher interest rates for a longer period, according to Allianz Trade analysis. While headline inflation in June was in line with expectations at 5.4 percent y/y (down from 6.1 percent y/y in May), core inflation increased to 5.4 percent y/y (up from 5.3 percent y/y in May). Services inflation rose again to 5.4 percent y/y (from 5.0 percent y/y in May), as expected, with a significant base effect related to the 9 euro ticket in Germany. Goods inflation decreased to 5.5 percent y/y (from 5.8 percent y/y), but it was lower than anticipated. 

Every month, price changes are currently much weaker than at the beginning of 2023, and deflationary forces (excluding services) are gaining momentum as the money supply declines. Before the release of the latest inflation data, we raised our final expectations for the ECB to 4.0 percent, assuming that it will continue raising rates even after the July meeting with an additional 25 basis points in September.

(WBJ)