With inflation continuing to decline in Europe, the peak for interest rates likely isn’t far off, says Fitch Ratings.
In a new report, the rating agency noted that the headline inflation rate for the eurozone dropped to 5.3% in July from 5.5% the previous month, and it expects the rate to continue declining to 4% by the end of the year.
“Energy prices have made the biggest contribution to reducing the annual rate of headline inflation from its October 2022 peak, and moderating food price inflation will continue to help lowering it heading into 2024,” Fitch said.
However, core inflation now sits above the headline reading, at 5.5%,
As a result, Fitch says further declines in inflation are increasingly reliant on lower core inflation.
In particular, services inflation, which hit a new high of 5.6% in July, is proving the most resilient due to “rising wages, energy costs and rebalancing of demand,” it noted.
However, goods prices are dropping due to easing supply chain issues and lower input costs, which Fitch said is “setting up a period of low core goods inflation.”
It expects core inflation to continue declining in August, easing pressure on monetary policy.
“Though inflation remains well above target and there may be shocks to come, the [European Central Bank] will probably not need to raise its near-term inflation forecasts further in September. Even some hawks on the ECB Governing Council have advocated pausing interest rate rises, making it less likely that the terminal rate will exceed our June forecast of 4.5%,” Fitch said.