In September, inflation in the eurozone fell below the European Central Bank’s (ECB) target for the first time in over three years, marking a significant development in the region’s economic landscape. Data released on Tuesday showed that consumer prices rose by 1.8% on average across the 20 countries using the euro, down from 2.2% in August. The ECB, which aims to keep inflation around 2%, last reached this target in 2021. With inflation now back below the target, many investors expect the central bank to accelerate the pace of interest rate cuts.
Market sentiment reflects this expectation. The likelihood of a rate cut in the ECB’s next meeting has surged to over 90%, up from less than 67% just a week earlier. Investors and analysts alike are watching the ECB closely, as policymakers prepare to meet in October. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, pointed out that “policy rates are too restrictive in the euro area,” anticipating a quarter-point decrease in the next decision.
The ECB has been walking a tightrope between curbing inflation and avoiding excessive damage to the region’s struggling economy. After raising rates to tame inflation during 2022 and early 2023, the central bank began lowering them cautiously this year. Rates were cut in June, but after a pause in July, another reduction followed in September. Despite these cuts, inflation in certain sectors, particularly services, has remained stubbornly high. Services inflation has hovered around 4% for the last five months, complicating the ECB’s task of bringing down prices without reigniting inflationary pressures.
However, the sharp drop in overall inflation in September strengthens the argument for further rate cuts. ECB President Christine Lagarde expressed cautious optimism during a European Parliament committee hearing, saying, “The latest developments strengthen our confidence that inflation will return to target in a timely manner. We will take that into account in our next monetary policy meeting in October.” Her remarks, along with recent economic data, have bolstered expectations of an interest rate cut this month.
Still, some analysts believe that the ECB may delay additional cuts until December. They argue that the persistence of inflation in services, as well as lingering uncertainties about the global economic outlook, could cause the ECB to remain cautious in the short term.
Despite the inflation drop, the eurozone’s economic challenges remain significant. Economic growth in the region has been sluggish, with many countries grappling with high debt levels, weak consumer demand, and external shocks such as the war in Ukraine. According to the International Monetary Fund (IMF), eurozone GDP growth is expected to slow to just 0.7% in 2024, reflecting the difficulties facing the region.
With inflation now seemingly under control, the focus will shift to how the ECB manages its monetary policy in the coming months. The central bank’s decisions will be crucial, not only for stabilizing inflation but also for supporting the eurozone’s fragile economic recovery. Investors, businesses, and consumers alike are watching closely as the ECB navigates these turbulent waters.