Eurozone Inflation Drops to 1.7% in September Shifting Focus to the ECB

Eurozone Inflation Cements 25-Basis Point ECB Rate Cut but What About December?

Eurozone inflation figures took center stage on Thursday, October 17, ahead of the ECB’s interest rate decision and press conference.

The annual inflation rate fell from 2.2% in August to 1.7% in September, below the ECB’s 2% target for the first time since June 2021.

According to Eurostat, inflation data showed the following trends in September:

• The highest contribution to the annual Eurozone inflation rate came from services (+1.76 percentage points, pp), food, alcohol, & tobacco (+0.47 pp), and non-energy industrial goods (+0.12 pp).
• Conversely, energy had a negative contribution, dropping by 0.60 pp.
• Among member states, Ireland (0%), Lithuania (0.4%), Slovenia and Italy (0.7%) had the lowest annual rates of inflation.
• Notable member states with inflation below the ECB’s 2% target included France (1.4%), Germany (1.8%), and Spain (1.7%).
• Belgium had the highest annual inflation rate at 4.3%.

Other economic indicators showed the Eurozone trade surplus narrowed from €21.2 billion in July to €4.6 billion in August. Imports and exports signaled weak demand. Despite the trade report, markets remained focused on the inflation data ahead of the ECB interest rate decision.

Impact on ECB Monetary Policy

The fall in the annual inflation rate below the ECB’s 2% target has bolstered economists’ expectations of a 25-basis point rate cut on Thursday. While markets had already priced in a 25-basis point rate cut for October, the lower inflation figures may raise expectations for additional cuts in December.

Multiple Q4 2024 ECB rate cuts could lower borrowing costs, possibly boosting private consumption. However, a deteriorating Euro area economy may raise concerns about deflation risks. The Eurozone last experienced deflation during the COVID-19 pandemic and previously in 2015-2016 due to falling energy prices.

Notably, the ECB has previously taken extreme measures to battle deflation, including negative interest rates from June 2014 until July 2022. The ECB press conference might offer insights into deflation risks and future rate decisions.

Expert Views on the ECB Rate Path

Fred Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, commented on the ECB policy outlook, stating,

“Key focus ahead of today’s ECB’s decision will be whether they signal faster rate cuts, and whether they drop the commitment to keeping policy sufficiently restrictive. Both unlikely at this stage, if only as a concession to the hawks, but it may only be a matter of time.”

EUR/USD Reaction to Eurozone Inflation and Trade Data

Before the Eurozone inflation and trade data, the EUR/USD touched a high of $1.08687 before falling to a pre-data low of $1.08487.

However, following the data release, the EUR/USD dipped to a low of $1.08500 before rising to a high of $1.08528.

On Thursday, October 17, the EUR/USD was down 0.08% to $1.08524. The EUR/USD had a limited reaction to the data as investors await the ECB interest rate decision and press conference.