(Bloomberg) -- Euro-area inflation slowed below the European Central Bank’s 2% target for the first time since 2021 — backing investor bets that interest rates may be lowered more quickly than previously anticipated.
Consumer prices rose 1.8% from a year ago in September, down from 2.2% in the previous month as energy costs fell sharply, Eurostat said Tuesday. The reading matched a Bloomberg survey of analysts — as was core inflation, which eased to 2.7%.
The data will reinforce the growing conviction among investors that the ECB must loosen monetary policy more speedily to account for a stuttering economy and unexpectedly rapid disinflation.
President Christine Lagarde hinted as much on Monday, telling European Union lawmakers that officials will take growing optimism on consumer prices into account at their next decision on Oct. 17.
The euro traded 0.4% lower at about $1.109, retreating from a near two-year high. Money markets now see an almost 90% chance that this month’s meeting will bring a third reduction of the year in rates.
Another quarter-point move is likely to follow when policymakers convene in December for the final time in 2024. That would bring the deposit rate down to 3% from 3.5% currently.
Economists have adjusted their rate calls as well, with Goldman Sachs and JPMorgan among the slew of Wall Street banks to now predict a step this month.
“We expect the ECB to start a series of back-to-back cuts by 25 basis points in October,” Morgan Stanley economists led by Jens Eisenschmidt said in a note. “Upon reaching 2.5% in March we expect it will slow down and revert to a more gradual cutting schedule with a cut at every projection meeting.”
The ECBspeak Index from Bloomberg Economics shows that dovish sentiment has dominated since the start of the summer.
Faster monetary easing began to be factored in after business surveys by S&P Global last week surprisingly showed the euro-zone economy contracting in September, with demand weakening and price pressures easing. Reinforcing that idea, national data from Germany, France and Spain showed inflation moderating beneath 2%.
The headline numbers, though, are being depressed by volatile energy costs and will probably increase again toward year-end. And other gauges are stubbornly high.
Services inflation — a metric that officials have focused on to determine the strength of domestic price pressures — only dipped to 4% in September from 4.1% the previous month.
Wage growth, a major driver of services costs, has been sticky but has started to ease. ECB Chief Economist Philip Lane expects that trend to continue once workers’ pay has made up for the loss in purchasing power seen in recent years.
Lagarde acknowledged these developments in her hearing, saying “we have reasons to believe that services is also beginning to abate, slowly and gradually, so we are heading in that direction of reduced inflation.”
What Bloomberg Economics Says...
“It looks as though underlying cost pressure is ebbing. Inflation will tick up in the coming months on base effects, but the broader outlook is for widespread disinflation. Our forecasts show a persistent target undershoot in 2025.”
—Jamie Rush, chief European economist. Click here for full REACT
Concerns about the economy, meanwhile, are on the rise — largely down to the increasingly dire prospects for Germany’s manufacturing sector. The government in Berlin is set to lower its economic-growth forecast for this year, expecting stagnation at best following a full-year contraction in 2023.
That’s dampened the mood among consumers, who remain hesitant to open their wallets even as they benefit from slower inflation and rising incomes.
Headwinds for economic growth “mean I can’t yet declare that a so-called soft landing is ensured,” Finnish central-bank chief Olli Rehn said Tuesday. “This should be taken into account in the future decision-making of monetary policy, without jeopardizing price stability.”
--With assistance from Joel Rinneby, Barbara Sladkowska, Leo Laikola, Constantine Courcoulas, Kristian Siedenburg and Mark Schroers.
(Updates with economists in eighth paragraph)
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