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Euro zone business growth slows as ECB meets

By Jonathan Cable

LONDON (Reuters) - Euro zone firms expanded at their slowest rate in six months in June while cutting the prices they charge, surveys showed, signalling business conditions remain tricky as monetary authorities prepare to give a policy update.

Business activity in France, the euro zone's second-biggest economy, shrank at the fastest rate in four months while in Germany, the largest, the pace of growth slowed.

Service providers also said they cut prices for the 31st month running to drum up business, although not as sharply as in May. With June inflation at just 0.5 percent in the euro zone, the surveys will provide worrying reading for policymakers.

Still, the European Central Bank's Governing Council is not likely to take new policy action at its meeting on Thursday, after cutting interest rates to record lows last month and unveiling a 400-billion-euro loan programme.

It is instead expected to give more details about the bank's existing plans, which the ECB hopes will help entice commercial banks to lend more freely, particularly to small and medium-sized companies on the euro zone periphery.

"We are not expecting any further action from the ECB today, it looks like it has deployed all the policy instruments. (So) we will wait for the actual implementation later in the year," said Tom Rogers at Oxford Economics.

Markit's Composite final June Purchasing Managers' Index (PMI) for the euro zone, based on surveys of thousands of companies across the region and a good indicator of growth, was in line with a preliminary reading of 52.8, down from May's 53.5.

The PMI for the euro zone's dominant service industry fell to 52.8 from 53.2, also in line with an earlier flash reading and above the 50 mark that separates growth from contraction.

A resurgence in Spain and Italy supported German expansion but France again provided the biggest drag on the bloc's tentative recovery.

French business activity contracted for the second month in a row, casting fresh doubt on the strength of the 2 trillion euro economy.

"We are looking at quarterly growth in France possibly being flat again or very weak and that has ramifications for the euro zone," Rogers said.

Euro zone retail sales were flat in May, separate data showed earlier on Thursday, giving further evidence of a lack of momentum in the bloc's economy.

It was a different story across the channel in Britain, whose services industry expanded steadily, suggesting the economy grew robustly throughout the first half of 2014 and possibly pointing to an interest rate hike this year.

While Bank of England officials have recently given mixed signals on the timing of a potential interest rate rise, the BoE is widely expected to be the first major central bank to begin hiking borrowing costs.

They say markets have underestimated the likelihood of a move in 2014, but also think more slack needs to be used up before that happens.

"Rate hikes rising up the agenda has the potential to cause some minor wobbles in sentiment indicators over the next few months, but we do not expect a very small interest rate hike to derail what is looking like an increasingly solid recovery," said Rob Wood at Berenberg Bank.

(Additional reporting by Ana Nicolaci da Costa, editing by John Stonestreet)

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