Inflation remains calm but the ECB must remain vigilant

With the latest Eurozone inflation rate coming in at 2% for June, the European Central Bank is hitting its official target. As inflationary pressures continue to ease, inflation could decrease even further for the remainder of this year.

The success that the ECB has had in curtailing inflation and retaining the Euro’s strength will have had a huge part in giving ECB President Christine Lagarde the confidence to suggest that the Euro could replace the Dollar as the global reserve currency — in an era of changing US economic policy, perhaps she is not wrong to now see the Euro as a viable alternative, despite memories of the Eurozone Crisis lingering in the background.

While a stronger Euro and lower inflation will offer comfort to policymakers, underlying risks remain. The ECB must continue to walk a fine line between supporting economic growth across the Eurozone and maintaining a guard against the possibility of another wave of inflation — especially stemming from volatile energy markets, ongoing global trade tensions, and service-sector wage pressures.

Following a period of intense interest rate-cutting, culminating in a cut of the deposit rate to 2.15% in June, we are likely to see the European Central Bank shift to cutting rates more gradually over the coming months. They will not cut rates too low, as they will be wary of causing another surge in inflation.