EU inflation drops, more rate cuts expected
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The news: Euro-zone inflation dropped to 1.8% in September, falling below the ECB’s 2% target for the first time since 2021, according to data from Eurostat.
The context: The decline, mainly due to falling energy costs and lower goods prices, has bolstered investor expectations for further ECB rate cuts after it trimmed rates in June and September.
Money markets seeing a 90% chance of a third cut this month.
Economists at Morgan Stanley, Goldman Sachs and JPMorgan expect consecutive 25-basis-point cuts starting in October, with rates potentially reaching 2.5% by March, according to Bloomberg.
The numbers: Core inflation, which excludes volatile energy and food prices, eased to 2.7%, from 2.8% the previous month. Services inflation, a much-watched component that has been hard to tame and still has the highest rate of inflation in the EU, fell to 4%, down from 4.1%.
National data showed inflation moderating in key countries including France, Germany and Spain.
The euro reacted by trading 0.4% lower at about USD1.109, pulling back from a near two-year high as expectations for an ECB rate cut intensified.
What they said: ECB President Christine Lagarde said that while services inflation remains high at 4%, "we have reasons to believe that services is also beginning to abate, slowly and gradually, so we are heading in that direction of reduced inflation," she said.
“Inflation is now under the baseline predicted by the ECB,” she said, earlier than projections of a return to the 2% target by the end of 2025.
