Euro zone inflation fell to 1.8% in September, below the European Central Bank’s 2% target, according to data from Eurostat. The core inflation rate, excluding volatile energy, food, alcohol, and tobacco prices, came in at 2.7%. The easing of services inflation to 4% in September reflects a general trend of lower inflation in key euro zone economies like France and Germany. While there may be a temporary rebound in inflation, it is expected to remain below 2% in the coming year.
Analysts like Franziska Palmas of Capital Economics and Bert Colijn of ING have differing views on the future of inflation in the euro zone. Palmas believes that headline inflation falling below 2% could lead to a rate cut by the ECB in October. Colijn, on the other hand, is unsure about a renewed pickup in inflation due to falling oil prices impacting petrol prices. The ECB President Christine Lagarde expressed confidence that inflation will return to the 2% target in a timely manner, suggesting that a rate cut might be necessary at the next monetary policy meeting in October.
Economic growth and inflation falling below the 2% target are crucial considerations for the ECB, according to ING’s Colijn. Keeping interest rates restrictive for too long while the economy is slowing could push inflation below target. Therefore, there is pressure on the ECB to potentially move faster with rate cuts to support the economy. Bank of America Global Research economists have revised their expectations for ECB interest rate cuts following Lagarde’s comments, now anticipating a rate cut in October. Deutsche Bank economists have also adjusted their forecast for the next ECB rate cut from December to October.
Market expectations for a 25-basis-point rate cut in October have increased following the latest euro zone inflation data, as per LSEG data. The data suggests that markets are pricing in a rate cut in October, anticipating further monetary policy action by the ECB to support economic growth and bring inflation back towards the 2% target. The impact of falling oil prices on inflation and the overall economic outlook will be crucial factors for the ECB’s decision-making in the upcoming monetary policy meeting.
In conclusion, the euro zone’s inflation rate falling below the 2% target in September has raised expectations of a potential rate cut by the ECB in October. Analysts have differing views on the future of inflation, with some forecasting a rebound while others remain cautious. Market expectations for a rate cut have increased following the comments from ECB President Lagarde, signaling a potential shift in monetary policy to support economic growth and bring inflation back towards target levels. The decision at the upcoming ECB meeting will be closely watched for its implications on the future direction of monetary policy in the euro zone.
