Inflation has fallen to its lowest level in Germany since February 2021, while inflation in the eurozone is down to 1.8 percent, dropping below the European Central Bank’s target for the first time in three years, collectively strengthening the case for another ECB interest-rate cut next month.
According to figures released by the Destatis federal statistics office on Monday, Germany’s inflation rate in September declined to 1.8 percent, a drop that exceeded predictions. On Tuesday, preliminary figures from Eurostat showed eurozone inflation dipped under the ECB’s 2-percent goal, aligning with economic analysts’ forecasts.
The ECB has implemented two interest rate reductions this year, and market expectations have recently shifted to strongly anticipate another quarter-point cut this month.
Financial markets expect the ECB to reduce its key interest rate to 3.25 percent at its upcoming meeting on Oct 17, following reductions in June and September, reported the Financial Times newspaper.
Carsten Brzeski, global head of macro at ING, said the German inflation data strengthens the argument for the ECB to reconsider a rate cut.
“The recent series of disappointing economic sentiment indicators and lower-than-expected inflation data have provided new strong arguments for ECB doves,” Brzeski said.
The FT reported that economists at RBC Capital Markets, Goldman Sachs, JPMorgan, BNP Paribas, and T Rowe Price have also revised their forecasts to say that an October ECB cut was likely.
In September, Germany’s core inflation, which does not include fluctuating food and energy prices, decreased to 2.7 percent from August’s 2.8 percent, said Destatis. Inflation had already recently declined in two other key eurozone economies, Spain and France, and, earlier on Monday, figures revealed that Italy also experienced a decrease in inflation.
Andrew Kenningham, chief Europe economist at Capital Economics, was cited by Reuters as saying that the September declines in both overall and services price growth across key euro-area nations, coupled with indications of economic deceleration, have heightened the likelihood of the ECB implementing another interest rate reduction in October.
“We will firm up our forecast for the ECB but the risks are clearly tilting towards earlier rate cuts than we had anticipated,” Kenningham said.
Though German inflation is easing, economic challenges persist according to Netherlands financial institution ING, which recently cautioned that the country’s economy might be mired in stagnation.
ING said on its website: “The German economy is back where it was a year ago: the growth laggard of the eurozone with few signs of an imminent improvement. After the contraction of the economy in the second quarter, all available sentiment indicators for the first two months of the third quarter provide very few reasons for optimism.”