Inflation in Europe took a significant step down in September, with France and Spain both reporting slower price growth than the European Central Bank’s (ECB) target rate of 2%. This development has ignited speculation and increased the likelihood of an ECB interest rate cut at its meeting next month.
France’s Harmonized Consumer Price Index (HCPI) eased to 1.5% in September, a notable drop from August’s 2.2%. This figure came in below the consensus forecast of 1.9%, according to TradingView. The data sparked reactions from analysts, with Andreas Steno Larsen, CEO of Steno Research, calling it the “softest inflation report EVER from France” and predicting a rate cut in October.
Spain also experienced a decline in inflation, with its annual HCPI settling at 1.7% in September, compared to 2.4% the previous month. This figure also fell below consensus expectations, further fueling the call for a rate cut.
Money markets have responded swiftly to the inflation data, with the probability of an ECB interest rate cut in October rising to 79%. This represents a significant jump from 60% on Thursday and a mere 25% a week ago. Analysts at BNP Paribas and Bloomberg Economics have joined the chorus of voices calling for a rate cut in October.
However, while the latest inflation data offers strong support for a rate cut, ECB President Christine Lagarde remains cautious. In September, she warned that European inflation is expected to rise again later this year before declining towards the target rate in the second half of 2024. Lagarde’s comments highlight the complex and uncertain nature of the economic landscape.
Adding to the pressure for a rate cut, the Eurozone is grappling with slowing growth. German unemployment rose to 3.8% in August, signaling a weakening labor market. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, has even suggested that the Eurozone is “heading towards stagnation.”
The latest inflation data and the persistent economic headwinds have created a dynamic environment for the ECB. While the pressure for a rate cut is growing, the ultimate decision will be based on a careful analysis of all available data and a consideration of the potential consequences of such a move.
