Eurozone Inflation Falls to 2.2%, Paving the Way for Potential ECB Rate Cut in September

Inflation in the eurozone dropped sharply to 2.2% in August, down from 2.6% in July, according to data released by Eurostat. This significant decline, particularly driven by a 3% reduction in energy prices, has brought inflation closer to the European Central Bank’s (ECB) target of 2%, potentially setting the stage for an interest rate cut in September.

Germany, the eurozone’s largest economy, saw inflation fall to 2%, further increasing the likelihood of a rate reduction by the ECB. The central bank, which is tasked with maintaining price stability, may respond by cutting its key rate by a quarter point from 3.75% at its upcoming meeting on September 12. Similarly, the U.S. Federal Reserve is expected to cut its rates from the current 23-year high of 5.25%-5.5% at its policy meeting on September 17-18.

Carsten Brzeski, global chief of macro at ING bank, noted that the lower inflation figure in Germany “tilts the balance toward a September rate cut,” citing the combination of fading inflationary pressures and weakening growth momentum as ideal conditions for such a move.

However, economists caution that the journey to consistently low inflation may not be smooth. The ECB has indicated that while inflation is expected to fluctuate in the coming months, it should reach the 2% target by the end of 2024. The central bank has been cautious, as maintaining rates that are “too high for too long” could negatively impact economic activity and employment, potentially leading to inflation falling below target.

The eurozone’s economy grew modestly by 0.3% in the second quarter, but high interest rates have already dampened house prices, reduced consumer and business loans, and complicated financing for new renewable energy projects. As central banks in both Europe and the U.S. navigate the delicate balance between controlling inflation and supporting economic growth, the ECB’s upcoming decision will be closely watched.

ECB head Christine Lagarde has emphasized that future rate decisions will be made on a meeting-by-meeting basis, depending on the latest economic data. While the ECB made its first rate cut in June and paused in July, the recent inflation figures suggest that the central bank may soon resume cutting rates, provided the economic outlook continues to improve.