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Eurozone inflation dropped to 1.8 per cent last month, dipping below the European Central Bank’s target for the first time in three years and bolstering expectations of an interest rate cut at its next meeting.
Tuesday’s preliminary figures for annual consumer inflation for September matched economists’ expectations in a Reuters poll and compared with August’s rate of 2.2 per cent.
Markets anticipate that the ECB will cut benchmark rates by a quarter point to 3.25 per cent when it meets next on October 17, following reductions in borrowing costs in June and September.
The Eurostat inflation figures were the lowest since early 2021, reflecting lower price pressures across most of the Eurozone, notably in Germany, France and Italy. Inflation in the region peaked at 10.6 per cent in October 2022.
Following the release of the figures, the euro slipped 0.2 per cent to $1.1106. The yield on German two-year Bunds — which move inversely to prices and reflect Eurozone interest rate expectations — was down 0.02 percentage points at 2.03 per cent.
“September’s significant fall in headline inflation bolsters expectations that the ECB will cut rates for the second consecutive meeting in October,” said Diego Iscaro, head of European economics at S&P Global Market Intelligence.
However, services inflation, a key indicator of domestic price pressures, remained elevated at 4 per cent, only marginally down from 4.1 per cent in the previous month.
Iscaro argued that the services data “suggest that a cut is not a done deal yet”.
The ECB expects inflation to bounce back temporarily at the end of this year, as earlier falls in energy prices are no longer reflected in the Eurostat statistics. But Christine Lagarde, the bank’s president, on Monday reaffirmed her confidence that “inflation will return to [the ECB’s 2 per cent] target in a timely manner”.
Price pressures have also receded in other regions, with the US Federal Reserve cutting rates by half a point in September and the Bank of England making a quarter-point cut in August.
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