ECB's Lagarde welcomes small inflation fall despite stubborn services

By Francesco Canepa and Balazs Koranyi

SINTRA, Portugal (Reuters) -European Central Bank President Christine Lagarde welcomed a small fall in inflation last month as a step in the right direction, even as data on Tuesday showed prices for services continued to rise nearly twice as fast as the headline figure.

The ECB began undoing its steepest ever streak of interest rate hikes last month after a major fall in inflation over the past 1-1/2 years but is in no hurry to lower borrowing costs further as progress from here appears to be slower.

Inflation in the 20 countries that share the euro slowed to 2.5% in June from 2.6% a month earlier.

"It's heading in the right direction for the indicator that we use," Lagarde told the ECB Forum on Central Banking near Sintra, Portugal, after the data was released.

She said the ECB was "very advanced" on the disinflationary path and predicted that inflation would be "in the low twos" in 12 months' time before hitting the ECB's 2% goal in the second half of next year.

Economists are scrutinizing underlying price trends to gauge whether the ECB can achieve that aim, particularly services inflation, which came in at 4.1% for the second consecutive month in June.

Lagarde acknowledged that services inflation hadn't "budged", saying this was in large part due to wages finally catching up with prices, but argued that was partly being compensated for by lower manufactured goods price inflation.

"We don't need to have services at 2% because manufacturing goods are below 2% and at the end of the day it's going to be a balance," Lagarde said.

Other policymakers, speaking anonymously on the sidelines of the event, said Tuesday's inflation data was a nail in the coffin for any rate cut in July, with no policy move now in prospect until September's meeting.

Financial markets expect the ECB to cut rates on Sept. 12 and possibly again on Dec. 12.

(Reporting By Francesco Canepa, Editing by Timothy Heritage and Catherine Evans)