ECB under pressure to cut rates as inflation falls

Inflation in the eurozone is expected to have fallen below the bloc’s 2 per cent target for the first time in three years this month, piling pressure on the European Central Bank to deliver more aggressive interest rate cuts.
Preliminary estimates for consumer prices in France and Spain showed an undershoot in inflation in September, figures that are likely to drag the overall inflation rate in the single currency area from 2.2 per cent last month to below the ECB’s 2 per cent target. Annual eurozone inflation last fell below 2 per cent in June 2021.
France, the European Union’s second largest economy, recorded a big drop in annual consumer prices growth this month, which slowed from a rate of 1.8 per cent to 1.2 per cent. France’s harmonised measure of inflation, which is comparable with other eurozone economies, fell from 2.2 per cent to 1.5 per cent.
The declines were caused by falling global oil prices in September and a slowing rate of services inflation after the Olympic Games. In Spain, the harmonised headline inflation dropped from 2.4 per cent to 1.7 per cent over the year.
“September’s inflation data from France and Spain all but confirm that the headline rate in the eurozone as a whole will show a sharp decline to below the 2 per cent target,” Franziska Palmas, at Capital Economics, the consultancy, said.
Falling inflation and a string of weak economic data have caused traders to increase their bets on the ECB cutting borrowing costs at its next meeting on October 17, but the central bank’s policymakers are divided on the need for another monetary easing. The ECB has already lowered borrowing costs by half a percentage point this year to 3.5 per cent, in the face of weak inflation and anaemic growth in France and Germany, its two largest economies.
Separate figures showed another decline in overall business confidence across the 20-country single currency area from 96.5 to 96.2 this month, according to data from the European Commission. Pessimism in the private sector was most pronounced in Germany and France, but confidence rose in Spain and Italy.
“According to the economic sentiment indicator, Germany is holding back the eurozone economy while Spain is the main driver of growth,” Melanie Debono, senior eurozone economist at Pantheon Macroeconomics, a consultancy, said. “This is consistent with our forecasts showing Spain still outperforming despite a likely slowdown in growth from the stellar 0.8 per cent quarter-on-quarter increases seen in the first and second quarter.”
In a boost for those demanding more interest rate cuts, the monthly sentiment survey found that businesses are expecting significant declines in their wage bills in the coming months, a factor that should help to keep inflation contained.
“The ECB is under pressure to deliver more monetary easing, having played down prospects of an October cut at its recent policy meeting,” Mark Dowding, chief investment officer at BlueBay Asset Management, said. “A more doveish stance from Christine Lagarde [the ECB president] next month now looks likely to us.”
Key measures of inflation in the United States fell in August, helping to ease fears of resurgent prices after the world’s most powerful central bank cut interest rates this month (Mehreen Khan writes).The US Federal Reserve’s preferred measure of annual inflation, known as the personal consumption expenditure index, fell to 2.2 per cent last month from 2.5 per cent, below economists’ expectations and the lowest reading in three years. A measure of “core” prices rose by 2.7 per cent over the year and by only 0.1 per cent between July and August, indicating a softening in inflationary pressures.The Fed cut borrowing costs by an outsized half a percentage point this month over worries about a slowing labour market.Jerome Powell, the central bank’s chairman, has said that policymakers are paying more attention to supporting US jobs and employment as inflation has fallen from a peak of just over 9 per cent in June 2022.