EuroZone inflation falls below 2%, strengthening case for ECB rate cuts

Inflation falls: Eurozone inflation drops to 1.8 per cent in September; the first time it has fallen below 2 per cent since mid-2021, strengthening the expectation of further interest rate cuts by the European Central Bank (ECB) this month. This marks the sharpest decline since February 2017, partly due to declining energy costs and stable prices for goods, Eurostat data shows on Tuesday. Analysts had foreseen a slighter contraction, predicting inflation to stand at 1.9 per cent.

On the other hand, core inflation, excluding volatile energy and food prices, eased a little to 2.7 per cent from 2.8 per cent, below expectations of 2.8 per cent. Inflation pressures ease as ECB's aggressive rate hikes continue to fight the surging prices which peaked at over 10 percent at the end of last year.

ECB policymakers are now debating how fast to ease borrowing costs after rate hikes in a round that set the process in motion. ECB President Christine Lagarde signalled on Monday that another rate cut may be nigh as the latest economic data have stepped up the debate, with recent figures showing weaker growth and subdued wage pressures.

Market expectations are now at an 85 per cent chance of a reduction on October 17, thus showing an enormous rise from the start of last week at just 25 per cent. Expectations have shifted towards potential cuts in December and January, with major banks adjusting their predictions accordingly.

In addition, although the ECB had earlier forecast inflation to rise above 2.5 per cent by year-end, falling oil prices form an important downside risk to this outlook and investors have speculated that the ECB is unlikely to meet its inflation targets.

As the central bank moves amid this changing economic landscape, new data underscore a key change in price behaviour: services inflation slowed to 4.0 per cent from 4.1 per cent as wage growth slowed, signs labour remains in slow decline.