According to Eurostat, September inflation data showed the following trends:
- The largest contributors to annual inflation in the euro area were services (+1.76 percentage points, pp), food, alcohol and tobacco (+0.47 points) and non-energy industrial products (+0.12 points).
- Conversely, energy had a negative contribution, decreasing by 0.60 pp.
- The lowest annual inflation rates among member states were Ireland (0%), Lithuania (0.4%), Slovenia and Italy (0.7%).
- Notable member states with inflation rates below the ECB's 2% target include France (1.4%), Germany (1.8%) and Spain (1.7%).
- Belgium had the highest annual inflation rate at 4.3%.
Other economic data showed the euro zone's trade surplus narrowed to 4.6 billion euros in August from 21.2 billion euros in July. Exports and imports showed weak demand. Despite the trade report, markets were still focused on inflation data ahead of the ECB's interest rate decision.
Implications for ECB monetary policy
Economists expected a 25 basis point (bp) rate cut on Thursday after annual inflation fell below the ECB's 2% target. Markets had already priced in a 25 basis point rate cut in October, but falling inflation data could increase expectations for another rate cut in December.
Multiple interest rate cuts by the ECB in the fourth quarter of 2024 could lower borrowing costs and boost consumer spending. However, concerns about deflation risk may increase due to the deterioration of the euro area economy. The last time the eurozone experienced deflation was during the COVID-19 pandemic, and previously in 2015-2016 due to falling energy prices.
In particular, the ECB has taken extreme measures to combat deflation, such as introducing negative interest rates from June 2014 to July 2022. The ECB press conference may provide insight into deflation risks and future interest rate decisions.
Expert views on the ECB's interest rate path
FRed Ducrozet, head of macroeconomic research at Pictet Wealth Management, commented on the ECB's policy outlook:,
