Eurozone inflation fell below the two per cent target for the first time since mid-2021, paving the way for the European Central Bank (ECB) to cut interest rates again this month.
Annual inflation fell to 1.8 per cent in September, down from 2.2 per cent in August and below the 1.9 per cent expected by economists.
Falling energy prices were the largest contribution to the lower headline rate, with energy prices falling six per cent in the year.
But the release also showed signs of progress on measures of underlying inflation. Core inflation, which strips out more volatile components, fell to 2.7 per cent from 2.8 per cent previously.
Services inflation, which policymakers have identified as a key gauge of domestic price pressures, fell to 4.0 per cent from 4.1 per cent the month before.
With the inflation release coming shortly after business surveys pointed to further weakness in the eurozone’s economy, analysts argued the case for another rate cut in October was increasingly compelling.
“The time for gradualism is over,” Natasha May, global market analyst at JP Morgan Asset Management, said.
The ECB cut rates for the first time since 2020 in July, following it up with another cut last month.
This brought the main interest rate to 3.5 per cent, down from the peak of 4.0 per cent reached last September.
Christine Lagarde, president of the ECB, has been unwilling to commit to a particular rate path going forward.
Still, economists think a stuttering economy will force the central bank into action.
According to S&P’s manufacturing purchasing managers’ index (PMI), released this morning, activity in the eurozone fell to a nine-month low in September.
The survey showed that demand remained very weak, with new orders falling at the fastest pace since December last year. The PMI also pointed to easing price pressures.
ECB officials pointed to a “subdued” outlook in last month’s meeting. In updated forecasts, released alongside September’s rate decision, the ECB projected that the bloc would grow just 0.8 per cent this year.
“With growth under pressure now, it seems that the door is open for the ECB to move faster,” Bert Colijn, an economist at ING said.
Markets now think that the ECB will cut rates twice more this year, in October and December.