European zone inflation fell below 2% for the first time since mid-2021 in September, further strengthening the case for an interest rate cut by the European Central Bank (ECB) this month as a three-year battle to curb excessive price growth draws to a close.
Inflation in the 20 countries that share the euro currency fell to 1.8% in September from 2.2% in August, according to Eurostat data released on Tuesday, below expectations of 1.9% in a Reuters poll, mainly due to lower energy costs and lower commodity prices. limited.
The more closely watched figure on core prices, known as core inflation, also eased to 2.7% from 2.8% due to slower growth in services prices, also below expectations of 2.8%.
Price growth has exceeded the central bank's target for several years now with soaring energy costs, production constraints following post-pandemic reopening, corporate opportunism, and massive fiscal support all pushing inflation to over 10% by the end of 2022.
Still, a series of record interest rate hikes by the central bank has quickly curbed price growth, and policymakers are now debating how quickly they should cut borrowing costs.
The ECB has cut interest rates in June and September, and ECB President Christine Lagarde gave the clearest signal yet on Monday that another cut is likely later this month given buoyant price trends.
Such a rapid rate cut was not expected until recently, but a series of disappointing growth data, easing wage pressures, and inflation readings below the ECB's projections have added to the urgency.
Adding to the rationale for the rate cut, services inflation which is likely to be the most watched component of price growth eased slightly to 4.0% from 4.1%, easing but not completely eliminating concerns that domestic price pressures remain high.
Rapid wage growth has driven up the cost of services for years but economists have long predicted a decline due to a softening labor market, weak growth, and smaller wage increases.
Falling energy costs remained the biggest contributor to deflation, while non-energy industrial goods prices rose just 0.4% from a year earlier, also lowering the overall figure.
Lagarde has noted that inflation is now below the baseline forecast by the ECB, a signal that challenges the narrative of prolonged price pressures and a return to the 2% target only by the end of 2025.
Investors increased their bets on a faster rate cut after Lagarde's comments, and markets now place an 85% chance of a rate cut on October 17, up from 25% at the start of last week.
They also set more than 50 basis points of movement until the end of the year, which means that successive reductions are now expected to take place in full.
This has prompted various bank economists to change their forecasts, with most of the big banks now predicting cuts in October and December, and possibly even January.
The ECB has forecast a rise in price growth to just over 2.5% around the end of the year, but much lower oil prices indicate a downside risk to this scenario, and investors now see a significant risk that the ECB will fall short of its target.
