Following the European Central Bank's interest rate increase last month, the path for monetary policy is now in a comfortable and favorable position, according to European Central Bank Governing Council member and Bank of France Governor Emmanuel Moulin. He made these remarks on Friday, noting that falling international oil prices, following a de-escalation of geopolitical tensions in the Middle East, are alleviating price pressures within the eurozone.
In a recent interview, Moulin emphasized that the central bank does not engage in forward guidance, stating that the decline in oil prices will help reduce inflation in the services sector. He added that officials have not yet observed any significant secondary effects. This statement comes as several ECB officials have recently clarified that the bank is not embarking on a new cycle of interest rate hikes.
Speaking to media at the Rencontres Economiques conference in Aix-en-Provence, the French central bank governor indicated that it is still too early to predict the outcomes of the upcoming July and September monetary policy meetings. However, he noted that some officials have been explicit in communicating that a new tightening cycle is not commencing.
"We do not provide forward guidance, so we will make our decisions based on the actual data at the time," Moulin stated. "But what we see is that, at this moment, at this juncture, we are in a good place. The balance of risks is also in the right place."
As illustrated in the accompanying chart, inflation in the eurozone has slowed more than economists had generally anticipated. ECB policymakers were united in their support for last month's 25-basis-point rate hike, driven by concerns that soaring oil prices were spreading throughout the eurozone economy. However, a potential U.S.-Iran peace agreement and an unexpectedly sharp slowdown in inflation are now creating significant divergence regarding the appropriate next steps.
Some policymakers argue that even if the immediate inflationary shock from energy costs subsides, its effects could still gradually feed into food prices, services, and wage demands. They particularly highlight the risk of persistently high prices in the services sector. Meanwhile, others point to recent economic data and changing circumstances as justification for the ECB to now pause and hold interest rates steady.
Investors have already scaled back their bets on further monetary tightening by the ECB this year. Economists, for their part, widely believe that inflation in the eurozone has peaked. "The fact that oil prices are falling will significantly ease services inflation," Governor Moulin said, reiterating that "at the moment, we are not truly seeing second-round effects."
Recent economic data for the eurozone presents a mixed picture of weak growth, strong employment, and receding inflation. The unemployment rate held steady at a record low of 6.2% in May, indicating that businesses have not yet engaged in large-scale layoffs. Conversely, headline inflation fell from 3.2% to 2.8% in June, coming in below market expectations of 3.0%. Core inflation also dropped from 2.6% to 2.4%, while services inflation declined from 3.5% to 3.2%. These figures suggest that falling oil prices and cooling demand are indeed weakening price pressures.
This latest batch of economic data appears insufficient to justify an immediate consecutive rate hike by the ECB. However, it is robust enough for the central bank to retain the policy option of implementing one more hike should secondary inflationary effects re-emerge. The rationale behind the June rate increase was to prevent the diffusion of energy price shocks from the Middle East. The ECB's latest projections still show inflation around 3.0% in 2026, 2.3% in 2027, and only returning to the 2.0% target by 2028.
Nonetheless, the rapid retreat in oil prices, a drop in consumer one-year inflation expectations from 4.0% to 3.5%, and the eurozone's composite PMI for June barely crossing the expansion threshold all diminish the immediate necessity for action in July. Financial markets are currently pricing in only about a one-third probability of a rate hike in July, with a full 25-basis-point increase not fully priced in until October.
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