A significant drop in Eurozone inflation to 2.2% in August, attributable to a decrease in energy prices, has led to assumptions of a likely decrease in interest rates by the European Central Bank (ECB) in the forthcoming month. The figure aligns with last month’s 2.6% rate and a predicted rate of 2.2% according to a Reuters poll. Earlier this week, both Germany and Spain unveiled decreases in inflation exceeding predictions, while Ireland revealed a remarkable decline to 1.1%, its lowest ever.
As inflation approaches the ECB’s target of 2%, financial markets are anticipative of a quarter-point reduction in the ECB’s prime interest rate to 3.5% at the organisation’s meeting on September 12th. The ECB earlier decreased rates by the same amount in June, much like the Bank of England had done recently. Expectations for further quarter-point cuts this year loom among swap market traders.
However, despite the decline in energy prices, factors such as the surge in service inflation to 4.2% could pose worries for officials setting rates, considering the current wage growth in Germany and other regions. Yields on German Bunds, which reflect Eurozone interest rate anticipations and move inversely to prices, were noted at a decrease of 0.01 percentage points at 2.35% upon the announcement of the inflation figures. The euro remained stable at $1.1076 for the day.
The US Federal Reserve is also predicted to decrease its prime rate for the initial time in over four years this September. Philip Lane, chief economist at the ECB, hinted at potential rate cuts in Europe, cautioning against persistently high interest rates which could result in prolonged low inflation, while also warning that returning to the 2% ECB target is uncertain.
Isabel Schnabel, a member of the ECB’s executive board, expressed her openness toward any potential rate cuts but advised that the central bank should be gradual and careful in decreasing rates. Additionally, separate data released indicated the Eurozone’s labour market’s resilience, with an insignificant decline in the adjusted rate of unemployment to 6.4% in July, from 6.5% the previous month.