Eurozone inflation has fallen below 2%, primarily driven by decreasing energy prices, raising expectations for further interest rate cuts by the European Central Bank (ECB).
Eurozone Inflation Hits New Low
Eurozone inflation has officially dropped below the European Central Bank’s (ECB) target of 2%. In September, annual inflation fell to 1.8%, down from 2.2% in August. This marks the first time inflation has dipped below the target since mid-2021. The decline is mainly attributed to falling energy prices, which decreased by 6% year-over-year.
This significant drop in inflation creates room for the ECB to consider another interest rate cut as early as this month. The latest inflation figures were below the expected 1.9%, further intensifying discussions on monetary policy adjustments.
Key Contributors to Falling Inflation
The largest driver behind the reduced headline inflation is the sharp decline in energy prices. This easing in energy costs has raised hopes for stabilizing inflation rates. Additionally, there are signs of progress in underlying inflation metrics:
- Core inflation—which excludes volatile items like food and energy—decreased slightly from 2.8% to 2.7%.
- Services inflation, another crucial measure of domestic price pressures, also saw a decline from 4.1% to 4.0%.
These trends indicate a cooling of price pressures across various sectors, which could encourage the ECB to take action.
Economic Outlook and Rate Cut Expectations
The timing of the inflation report coincides with recent business surveys pointing to further weakness in the eurozone economy. Analysts argue that the conditions are increasingly favorable for another rate cut in October.
“The time for gradualism is over,” said Natasha May, a global market analyst at JP Morgan Asset Management. This sentiment reflects a growing consensus that the ECB may need to respond more decisively to economic challenges.
In July, the ECB cut rates for the first time since 2020, followed by another cut last month. The current main interest rate now stands at 3.5%, down from a peak of 4.0% reached last September.
Weak Economic Activity
Recent data indicates that the eurozone’s economy is experiencing stuttering growth. According to S&P’s manufacturing purchasing managers’ index (PMI), activity fell to a nine-month low in September. This survey highlighted very weak demand, with new orders declining at the fastest pace since December of the previous year.
ECB officials have pointed to a “subdued” economic outlook during last month’s meeting. In updated forecasts, they projected a modest growth of just 0.8% for the bloc in 2024.
Bert Colijn, an economist at ING, noted, “With growth under pressure now, it seems that the door is open for the ECB to move faster.” Market analysts predict the ECB will likely cut rates two more times this year—in October and December.
The recent drop in Eurozone inflation below the 2% target is a significant development. It indicates easing price pressures, mainly driven by falling energy costs. As economic indicators show weakening activity, expectations are building for the ECB to respond with further rate cuts. The coming months will be critical in shaping the eurozone’s economic landscape and the ECB’s monetary policy trajectory.
