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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. Investors are pricing in a reduction in borrowing costs of about 1.7 percentage points by the end of next year.
“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.
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.
The Eurostat inflation figures were the lowest since early 2021, reflecting lower price pressures across most of the Eurozone, with rates also below the ECB’s 2 per cent medium-term target in Germany, France and Italy. Inflation in the region peaked at 10.6 per cent in October 2022, following a rise in energy and food prices after Russia’s full-scale invasion of Ukraine.
The decline in headline inflation was driven by energy prices, which dropped by an annual rate of 6 per cent, after falling 3 per cent in August. Core inflation, which excludes energy, food and tobacco, slowed marginally from 2.8 per cent in August to 2.7 per cent in September.
However, services inflation, a key indicator of domestic price pressures, remained elevated at 4 per cent, marginally down from 4.1 per cent in August.
Iscaro said the services data “suggests that a cut [this month] is not a done deal yet”.
But Natasha May, global market analyst at JPMorgan Asset Management, said the early signs of easing price pressures in services combined with recent weaker activity data implied “weaker longer-term inflation and makes the case for speedier policy normalisation”.
Figures released earlier on Tuesday showed that the HCOB Eurozone manufacturing purchasing managers’ index, a key gauge of the health of the sector, fell to a nine-month low of 45 in September, indicating an intensifying downturn among Eurozone manufacturers.
Statistics published last month showed that the Eurozone economy grew by just 0.2 per cent in the three months to June, with Germany registering a small contraction in output.
“Coupled with clear downside risks to economic growth, we think this [inflation data] will convince the bank to trim rates in October,” said Melanie Debono, economist at Pantheon Macroeconomics.
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 would return to the ECB’s 2 per cent] target “in a timely manner”.
Franziska Palmas, economist at the consultancy Capital Economics, said “it now seems very likely that, after a temporary rebound in the headline rate in the next three months, headline inflation will remain below target in the coming year”.
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.
