Eurozone inflation falls below 2% target in September, adding to expectations of another rate cut this month

Inflation in the Eurozone fell to 1.8% in September from 2.2% in August, and beat expectations for 1.9% rise, driven by lower energy costs and unchanged goods prices.

Inflation dipped below 2% target for the first time in three years, adding to positive signals that the ECB’s battle with inflation is in the final stage and also contributing to bets for another rate cut this month.

The same report showed that more closely watched core inflation, excluding the most volatile components, increased by 2.7% in September, compared to 2.8% rise previous month and beat 2.8% forecast.

Slower services price growth was the main contributor to lower than expected rise in underlying inflation in September.

Inflation has been above the ECB’s target for years, driven by surging energy costs as direct response to the war in Ukraine, production bottlenecks during the Covid crisis and enormous fiscal support, which caused a domino-effect and lifted inflation to over 10% in late 2022.

High inflation sparked an action from the central bank, which sharply increased interest rates and managed to bring inflation under control.

The EU policymakers now face the situation in which they need to decide about the pace of monetary policy easing, as the ECB has already reduced rates in June and September, and President Christine Lagarde sent the strong signal that another cut may come later this month.

Although such quick response from the ECB was not expected, weaker than expected growth data, easing wage pressures and inflation falling below the central bank’s projections, added to the urgency for the action.