Inflation cools in biggest euro economies, easing rate hike urgency

By Leigh Thomas

PARIS, June 30 (Reuters) - Inflation slowed more than expected across most major euro zone economies in June, preliminary data showed on Tuesday, easing pressure on the European Central Bank to raise interest rates in the near term.

Germany, France and Italy all reported softer-than-expected readings, while Spain was the only large economy where inflation did not ease. The figures increase the likelihood that overall euro zone inflation, due on Wednesday, could undershoot expectations.

Economists polled by Reuters have forecast the bloc's inflation at 3.0% for June.

"Upside risks to inflation have declined markedly," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics. While expectations remain elevated and energy prices could rise again, "there is no pressing need for the ECB to raise interest rates further," he said.

A sharp drop in energy prices in recent days has also reduced pressure on ECB policymakers ahead of their July meeting. However, the case for a modest rate hike later remains intact, four sources told Reuters.

UNDERSHOOTING EXPECTATIONS

In Europe's biggest economy, German inflation slowed to 2.4% in June from 2.7% the previous month, below the 2.5% forecast in a Reuters poll. Core inflation held steady at 2.5%, suggesting energy costs have yet to spill over more broadly.

French inflation fell more sharply, dropping to 2.0% from 2.8% in May, in line with the ECB's target and well below expectations of 2.3%.

The drop was mainly due to a 5% decrease in energy prices, services price inflation eased to less than 2% while prices for manufactured goods fell 0.9%.

Inflation also eased in Italy, dipping to 3.1% from 3.2% in May and defying forecasts for no change.

Spain was the exception among big euro zone economies with June inflation running at 3.6%, unchanged from May but above expectations for 3.4%.

(Reporting by Leigh Thomas in Paris, Maria Martinez in Berlin, Valentina Consiglio and Gavin Jones in Rome; Editing by Susan Fenton)