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Eurozone inflation fell sharply to a three-year low of 2.2% in August, raising expectations that the European Central Bank will cut interest rates next month.
Friday’s provisional figure was in line with a 2.2% forecast in a Reuters poll and down from last month’s 2.6%.
“The inflation environment is gradually becoming more benign” and the ECB has entered a long final phase, Bert Collin, euro zone economist at ING, said of progress in efforts to bring headline inflation closer to the ECB’s 2 percent target.
The Eurostat data came after Germany and Spain this week reported bigger-than-expected declines in their August figures.
France also reported on Friday that its inflation rate had fallen to 2.2 percent, but the figure was higher than expected and some economists attributed it to upward price pressures from the Paris Olympics.
With inflation approaching the European Central Bank’s target of 2%, markets expect the ECB to cut interest rates by 0.25 percentage points to 3.5% when it meets on September 12.
The ECB already cut rates by a quarter of a percentage point in June, and the Bank of England did the same this month. Swaps market traders are expecting two or three more quarter-point cuts in euro zone rates this year.
Friday’s data showed euro zone services inflation rose to 4.2 percent despite a drop in energy prices, which could raise alarm among rate-setters given rising wages in Germany and other countries.
Some economists say the rise is driven mainly by domestic factors, as accommodation and travel costs rise due to the Olympics, which may lead policymakers to treat July’s services-sector figures as temporary.
“August’s unexpected rise in services inflation is unlikely to persuade the ECB to stop cutting rates at its next meeting in September,” said Jack Allen Reynolds of Capital Economics.
The yield on German two-year government bonds, which moves inversely to prices and reflects euro zone interest rate expectations, fell 0.01 percentage point to 2.35 percent after Friday’s data was released. The euro was unchanged on the day at $1.1076.
The US Federal Reserve is also expected to cut interest rates in September for the first time in more than four years.
ECB chief economist Philip Lane suggested this month that further interest-rate cuts in Europe are likely, warning that keeping rates “too high for too long would lead to chronic below-target inflation in the medium term,” but cautioned that a return to the ECB’s 2 percent target was still far from certain.
ECB board member Isabelle Schnabel sounded an openness to cutting interest rates on Friday but said the central bank should do so “gradually and cautiously.”
Separate figures released on Friday showed the euro zone’s labour market remained strong, with the seasonally adjusted unemployment rate falling slightly to 6.4 percent from 6.5 percent in July.
