Euro zone inflation fell more than expected to 2.8 per cent in June, boosting the European Central Bank’s (ECB) attempts to bear down on price pressures unleashed by the Iran war.Wednesday’s estimate from Eurostat was below the 3 per cent forecast by economists in a Reuters poll and May’s 3.2 per cent figure.The ECB last month raised interest rates by a quarter point to 2.25 per cent, its first increase in borrowing costs since 2023, in a bid to contain inflationary pressures.Oil prices have returned to pre-war levels in recent days after the US and Iran agreed a deal to extend their ceasefire and reopen the Strait of Hormuz.Core inflation, which excludes volatile food and energy prices, was 2.4 per cent in June, down from 2.6 per cent in May and below the 2.5 per cent expected by economists.Services inflation, closely watched as a gauge of price pressures, dipped to 3.2 per cent in June from 3.5 per cent in May.[ Rising living costs weigh on Irish holiday spending plans, survey findsOpens in new window ]“Investors will be quietly pleased that inflation is not the concern it was just a couple of months ago,” said Michael Field, chief equity strategist at Morningstar.ECB president Christine Lagarde this week indicated that the central bank’s response to the inflation threat from the Iran war would be less aggressive than in 2022-23, when officials raised interest rates at a record pace to contain the inflation shock following Russia’s full-scale invasion of Ukraine.“We no longer need to act with the same force,” she said at the ECB’s annual forum in Sintra.The fall in oil prices in recent weeks had already prompted traders to scale back expectations for how rapidly the ECB would raise interest rates.Has the Irish building sector got themselves hooked on Government subsidies? Listen | 39:58Following the release of the June inflation data, traders continued to expect the ECB to deliver another quarter-point rate rise by the end of this year, according to levels implied by swaps contracts.The euro, which hit a one-year low against the dollar last week as traders pushed back expectations for rate rises from the ECB, was little changed at $1.139 on Wednesday.Despite the easing in price pressures, June was the fourth consecutive month that inflation in the 21-country bloc has exceeded the ECB’s medium-term target of 2 per cent.Commerzbank economists said the ECB would probably raise rates by another quarter point to 2.5 per cent in September, saying that inflation would remain about 3 per cent over the rest of the year even with lower energy prices.With energy prices still higher than they were a year ago, companies would try to pass on the costs to consumers, Commerzbank noted.Speaking at the Sintra Forum, Lagarde insisted that its June rate rise was not merely an “insurance hike” but based on the ECB’s assessment of the inflation threat.“Nothing we have observed since [June’s rate increase] has called this assessment into question,” she said.In a sign of the divisions among investors over the ECB’s next steps, Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions, said that June’s drop in inflation cast doubt on Lagarde’s verdict.“The data raises questions about whether the June hike was necessary,” he said, adding that second-round effects of higher oil prices “remained contained”. – Copyright The Financial Times Limited 2026