PARIS (AFX) - Euro zone inflation data today will show a clear decline in June from the 3.4 pct peak reached in May, but the lower inflation numbers will not be sufficient to prompt the European Central Bank to cut interest rates, economists said.
Economists are forecasting that inflation, as measured by the harmonised index of consumer prices (HICP), will decline to 3.0-3.1 pct year-on-year in June. Of 18 economists polled by AFX News, 11 forecast an inflation rate of 3.1 pct and seven predicted a 3.0 pct figure. Month-on-month the HICP is expected to be up 0.1-0.2 pct in June after rising 0.6 pct in May, economists said.
The figures are due to be released today at 11.00 am London time. ECB president Wim Duisenberg has already said that the central bank expects a "substantial" decline in inflation in June from the May peak of 3.4 pct but even this will still leave inflation well above the 2.0 pct price stability ceiling.
The ECB's overriding responsibility is to deliver an inflation rate below 2.0 pct over the medium term, and Duisenberg told the last ECB news conference that cutting interest rates now would compromise the central bank's forecast that inflation will fall back under 2.0 pct next year.
"Our forward-looking strategy and our analysis indicate that it is likely that inflation will come down to under 2 pct, which is our goal, in the course of next year only, but then only just...so if we were to change that, we would in all likelihood... not reach that goal," he said.
Duisenberg said that for this reason, current interest rates are likely to remain appropriate "for some time to come".
Rodolfo Dozio of Comit said the decline in inflation in June is therefore unlikely to lead to an early cut in interest rates.
"This decline in headline CPI will not be enough to trigger a rate cut, for instance at the beginning of August," he said.
The ECB council's Aug 2 meeting is the last before a four-week summer break. The council also meets tomorrow.
Lorenzo Codogno of Bank of America agreed that the June inflation data will not prompt the ECB to ease.
"The modest rise in euro zone month-on-month inflati on does not change the monetary policy outlook," he said.
Codogno said he does not expect a rate cut until the end of the third quarter or in the fourth quarter.
The ECB is particularly concerned about the possibility that higher wage rises could undermine its inflation scenario and says it is therefore closely monitoring wage developments. Cutting rates now could therefore send the wrong signal to wage negotiators, economists said. "Inflation has been high for quite some time and might start to feed through into higher expectations. This is particular worrisome with regard to next years wage rounds," said Ulla Kochwasser of Industrial Bank of Japan.
However, Commerzbank economists said the fact that inflation has now peaked means that the risks of second round effects via wage inflation will also have diminished. They said this could pave the way for a rate cut as early as the Aug 2 ECB meeting. But Kochwasser said there are also other inflation risks, not least from the changeover to euro notes and coins and fears that firms may round up prices after conversion into euros.
Even if inflation does decline to less than 2 pct next year, it is not expected to follow a smooth downward course between now and then, because base effects will lead to some volatility in the figures, according to Duisenberg.
"The road to the level under 2 pct may be a bumpy one. There may be months that inflation stabilises, or even there may be months where it shows a rise, but there will be more months that it shows a decline," he said.
Codogno said inflation could remain stuck at 3.0 pct in July and August, but Dozio said recent declines in oil prices point to a further decline in July.
Commerzbank economists also forecast a further decline in the months ahead, seeing the inflation rate declining to 2.5 pct by September.
National data have already shown inflation declining or remaining steady in the major euro zone economies in June.
Inflation slowed to 3.1 pct in Germany from 3.5 pct in May, to 2.1 pct from 2.3 pct in France and to 4.5 pct from 4.9 pct in the Netherlands. It was steady at 3.0 pct in Italy and 4.2 pct in Spain.