ECB’s vigilance regarding inflation remains.

■ Global demand for artificial intelligence (AI) continues to support the Eurozone economy, with personal consumption within the region also showing strong resilience.  

■ While ECB Governing Council members welcomed the easing of tensions in the Middle East, they remained wary of inflation. 
 
The Eurozone economy has demonstrated greater resilience than expected despite previous energy price increases. The final June PMI reading showed the composite PMI at 50.0, up 1.5 percentage points from the previous month and revised upward by 0.5 percentage points from the initial reading of 49.5, returning to the 50-point threshold separating expansion from contraction after three months. In terms of industry composition, new orders and output in information-related equipment and software and services sectors both increased significantly, indicating that global demand for AI is becoming a significant driver of Eurozone business activity. By sector, the manufacturing PMI was 51.4, down 0.2 percentage points from the previous month, but still above 50 for the fifth consecutive month and revised upward from the initial reading. Furthermore, the upward revision of the June PMI was mainly due to improved performance in the service sector. The services PMI was 49.4, up 1.7 percentage points from the previous month. Although it has remained below 50 since April, it rebounded significantly in June. The previous sluggishness in the services sector was mainly due to rising energy prices weakening household purchasing power and suppressing household consumption, but the June data alleviated this concern. 
 
Eurozone retail sales rose 0.2% month-on-month in May, indicating that consumption in the region remained resilient. Germany (up 1.1% month-on-month) was the main driver, with fuel sales recovering amid government policies to curb price increases; Spain (up 0.6% month-on-month) also maintained steady growth; while France (down 0.3% month-on-month) and Italy (down 0.3% month-on-month) saw declines. Looking at the Eurozone as a whole, although fuel sales continued to decline in May, with falling energy prices and increased demand for cooling due to the heat wave, consumption is expected to have further room for growth in June. 
 
Against this backdrop, the European Central Bank (ECB) held the ECB Forum from June 29 to July 1, with several Governing Council members delivering speeches. Most committee members welcomed the easing of tensions in the Middle East and the recent drop in energy prices, but this also reflected the ECB's continued high vigilance regarding inflation risks. ECB President Christine Lagarde stated, "We will cautiously adjust policy rates based on the impact of shocks." While the likelihood of a repeat of the sharp rate hikes seen in 2022 has decreased, the ECB will continue to closely monitor inflation trends and decide whether to raise rates further. Recent inflation data shows that the June Consumer Price Index (HICP preliminary reading) rose 2.8% year-on-year overall, while core inflation (excluding energy, food, alcohol, and tobacco) rose 2.4% year-on-year. Although the rate of inflation has slowed, it remains above the 2% target level. The July meeting is expected to keep the policy rate unchanged, while a further rate hike in September remains the baseline scenario. However, whether a rate hike will occur in September will still depend on the underlying inflation trend, and the second round of transmission effects from rising energy prices and wage growth will remain key factors to watch.