Eurozone inflation falls to lowest level in three years – raising hopes for ECB rate cut

The European Central Bank looks set to cut interest rates again at its next meeting after eurozone inflation fell to its lowest level in three years in August.

Eurozone inflation slowed from 2.6 to 2.2 per cent this month, according to data officials at Eurostat, thanks to a 3 per cent fall in energy prices helping to offset increases elsewhere.

The bloc faces a familiar inflationary problem to Britain in that while goods inflation is easing, core and services inflation remains too high.

Inflation in the UK rose in the last set of ONS figures, while interest rate forecasts remain divided on when the Bank of England will cut next. 

Core inflation in the eurozone eased from 2.9 to 2.8 per cent for the month while services inflation increased from 4 to 4.2 per cent, as wage inflation remained stubbornly high.

Bert Colijn, senior economist for the eurozone at ING bank, partially credited the increase to French services inflation, which ‘ticked up on the back of the Olympics in August’.

He added: ‘For the ECB, the modest progress in core inflation and wages now and expectations for next year seem enough to cut by 25 [basis points] in September.

‘But this remains a slow and gradual process of releasing the brakes on the economy as the ECB continues to be concerned about upside risks to the inflation outlook.’

Eurozone services inflation accelerated from 4 to 4.2 per cent in August 

The ECB became the first major central bank to begin easing monetary policy earlier this year, leapfrogging the Bank of England and US Federal Reserve to cut the eurozone’s key rate by 25bps to 3.75 per cent.

Markets now expect the ECB will follow up with another 25bps cut to 3.5 per cent next month, but there is less certainty about how the bank will approach monetary policy in the remainder of the year.

Michael Field, European market strategist at Morningstar, said that while core inflation ‘remains materially higher’ than the ECB’s target ‘it is at least moving in the right direction.

He added: ‘With inflation seemingly settling at or around where we need it to be, and unemployment stable, the ECB should reaffirm this in its course of action.

‘This sets us up nicely for further rate cuts this year.’

DIY INVESTING PLATFORMS

AJ Bell

AJ Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund dealing and investment ideas

interactive investor

interactive investor

Flat-fee investing from £4.99 per month

Saxo

Saxo

Get £200 back in trading fees

Trading 212

Trading 212

Free dealing and no account fee

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.

Compare the best investing account for you