Euro zone inflation fell to 1.8% in September, coming in below the European Central Bank’s 2% target. The core inflation rate, which excludes more volatile energy, food, alcohol, and tobacco prices, came in at 2.7%, slightly below forecasts and down from the 2.8% recorded in August. Services inflation in the euro zone also eased to 4% in September, down from 4.1% in August.
These figures come after inflation dropped below the 2% ECB target in several key euro zone economies, including France and Germany. While there could be a “temporary rebound” of inflation in the coming months, the headline reading is likely to remain below 2% in the coming year, according to Franziska Palmas, senior Europe economist at Capital Economics. European Central Bank President Christine Lagarde expressed growing confidence that inflation would return to the 2% target.
She said, “Looking ahead, inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner.”
Lagarde added that this will be taken into account during the next monetary policy meeting on October 17.
Euro zone inflation analysis
Capital Economics’ Palmas suggested that the dip in headline inflation below 2% “should be sufficient to persuade the ECB to cut rates in October,” even as services inflation remains elevated.
Economic growth and inflation falling too far below the 2% target are key considerations for the ECB, according to Bert Colijn, chief economist for the Netherlands at ING. “If it keeps interest rates restrictive for too long with the economy already slowing, it risks pushing inflation below its 2% target. With growth under pressure now, it seems that the door is open for the ECB to move faster,” he noted.
Bank of America Global Research economists have revised their expectations, now anticipating a rate cut in October following Lagarde’s comments. Deutsche Bank economists have also moved up their forecast for the next ECB rate cut from December to October. LSEG data shows that markets widely predict a 25-basis-point cut in October following the latest euro zone inflation data.
- CNBC.”Euro zone inflation falls to 1.8% in September, below the European Central Bank’s 2% target”.
- Reuters.”ECB will probably cut rates in Oct on risk of too low inflation: Villeroy”.
- Yahoo.”ECB Will ‘Quite Probably’ Cut Rates This Month, Villeroy Says”.