Eurozone Inflation Hits Three-Year Low, Fuelling ECB Rate Cut Expectations

Eurozone inflation fell to its lowest level in three years in August, according to data released on Friday, raising expectations of another interest rate cut by the European Central Bank (ECB) next month.

• Headline Inflation: Consumer price growth slowed to 2.2% year-on-year in August, down from 2.6% in July, moving closer to the ECB’s 2% target after three years of persistent above-target inflation.
• Core Inflation: Excluding volatile food and energy prices, core inflation eased slightly to 2.8%, from 2.9% the previous month, aligning with market expectations.

ECB Interest Rate Outlook

The ECB, which began cutting rates in June, is widely expected to continue with a 25 basis point cut at its September 12 meeting. Analysts are divided on whether more rate cuts will follow this year.

• ING Analysts: “The modest progress in core inflation and wages now and expectations for next year seem enough to cut by 25 bps in September,” but the process remains gradual as the ECB remains cautious about inflation risks.

Key Concerns

While inflation has eased, rapid wage growth continues to be a significant concern for the ECB, particularly in the services sector, which is highly sensitive to wage changes. ECB policymakers believe that it may take until the end of 2025 for inflation to sustainably reach the 2% target.

The ECB’s strategy of gradual rate cuts aims to support the economy while managing inflation risks, but future decisions will depend on further economic data and inflation trends.