Oil price fall weakens inflation impact, French central bank governor openly states that after the June rate hike, the ECB has entered a "comfort zone"

Member of the European Central Bank's Executive Board and Governor of the Bank of France, Emmanuel Moulin, stated on Friday that following the rate hike taken by the ECB last month, the easing of tensions in the Middle East has led to a drop in international oil prices, easing pressure on prices in the Eurozone. The monetary policy path of the ECB is currently in a comfortable "good position". Several ECB officials have made it clear recently that "we have not entered a new rate hike cycle", as Moulin emphasized in an interview saying, "we do not provide forward guidance, the fact that oil prices are falling will ease inflation in the service sector, and officials have not yet seen a second round of effects." The Governor of the Bank of France made these comments during an interview with the media at the Rencontres Economiques conference in Aix-en-Provence. While it may be too early to predict what will happen at the ECB's monetary policy meetings in July and September, some officials have already expressed that "we are not entering a new rate hike tightening cycle". "We do not provide forward guidance, so we will make decisions based on real data at that time," Moulin said. "But what we see is that at this moment, at this point, we are in a good position. The risk balance is also in the right place." As shown in the figure above, inflation in the Eurozone has slowed more than economists had expected. European Central Bank policymakers unanimously supported the 25 basis point rate hike last month, as they saw soaring oil prices spreading throughout the Eurozone economy. However, the unexpected US-Iran peace agreement and significant slowdown in inflation have created major disagreements on what to do next. Some policymakers believe that even as the impact of this round of inflation under energy cost pressures weakens, it may still slowly transmit to food, services, and wage demands, particularly as the situation of high prices in the service sector may persist. At the same time, others cite recent economic data and background changes as reasons for the ECB to currently shift towards maintaining interest rates unchanged. Investors have also reduced their bets on further monetary policy tightening by the ECB this year, and economists now generally believe that the peak of inflation in the Eurozone is behind us. "The fact that oil prices are falling will greatly ease inflation in the service sector," said ECB Governor Moulin, adding, "at the moment, we have not really seen a second round of effects." Recent economic data released in the Eurozone shows a mixed state of "weak growth, strong employment, and falling inflation": the Eurozone's May unemployment rate remained at a record low of 6.2%, indicating that Eurozone businesses have not yet significantly cut jobs; however, overall inflation in June decreased from 3.2% to 2.8%, lower than the market's expected 3.0%, core inflation also decreased from 2.6% to 2.4%, and service inflation decreased from 3.5% to 3.2%, indicating that falling oil prices and cooling demand are weakening price pressures. These latest economic data may not be enough to support the ECB's immediate consecutive rate hikes, but it is enough to give them the option to wait and see "if inflation starts to rise again, then we will hike again". The logic behind the June rate hike was to prevent the spread of the energy shock from the Middle East, the ECB's new forecast still shows inflation of about 3.0% in 2026, 2.3% in 2027, and returning to 2.0% in 2028; however, rapid fall in oil prices, consumer one-year inflation expectations falling from 4.0% to 3.5%, as well as the Eurozone composite PMI just crossing the boom-bust line in June, all weaken the need for immediate action in July, with the market pricing in only about a one-third probability of a rate hike in July, and fully pricing in one by October.