Inflation in the euro zone fell below the 2% target for the first time since mid-2021, paving the way for the European Central Bank (ECB) to cut interest rates again this month.
The annual inflation rate was 1.8% in September, down from 2.2% in August and lower than economists' expectations of 1.9%.
The biggest contributor to the decline in headline interest rates was the decline in energy prices, which fell by 6% over the year.
However, the latest announcement also showed signs of progress in indicators of underlying inflation. Core inflation, which removes more volatile factors, fell to 2.7% from 2.8% previously.
The services inflation rate, which policymakers use as a key measure of domestic price pressures, fell to 4.0% from 4.1% the previous month.
Analysts said the case for another interest rate cut in October was becoming increasingly convincing as the inflation figures came just after a business survey pointed to further weakness in the euro zone economy.
“The era of gradualism is over,” said Natasha May, global market analyst at JPMorgan Asset Management.
The ECB cut interest rates for the first time since 2020 in July, followed by another cut last month.
This brought the key interest rate to 3.5%, down from the peak of 4.0% in September last year.
ECB President Christine Lagarde is reluctant to commit to any particular interest rate path going forward.
Still, economists believe the economic downturn will force central banks to take action.
Eurozone economic activity fell to a nine-month low in September, according to the S&P Manufacturing Purchasing Managers Index (PMI) released this morning.
Demand remains very weak, with new orders falling at the fastest pace since December, according to the survey. The PMI also pointed to easing price pressures.
ECB officials said at last month's Governing Council meeting that the outlook was “subdued.” In its latest forecasts, released at the same time as its September interest rate decision, the ECB expected euro zone growth to be just 0.8% this year.
“Growth is now under pressure and it looks like the ECB may be able to act more quickly,” said Bert Collin, an economist at ING.
The market currently expects the ECB to cut interest rates twice more this year, in October and December.
By city AM
