Euro-area inflation accelerated beyond the European Central Bank’s (ECB) target, cementing expectations that officials will keep interest rates steady when they meet next week.
Consumer prices rose 2.1 per cent from a year ago in August, edging up from 2 per cent the previous month and meeting the estimates of economists in a Bloomberg poll. A core measure that strips out volatile components like energy and food held at 2.3 per cent. Closely watched gains in services prices eased to 3.1 per cent.
The report will confirm the ECB’s view that it can take another break from lowering borrowing costs on September 11, comfortable with both the pace of inflation and the economy’s ability to withstand higher US trade levies.
Officials already left the deposit rate at 2 per cent in July, with ECB president Christine Lagarde reiterating that the central bank is in a “good place” and investors no longer sure there’ll be any more decreases this year.
“We think the broad picture for inflation is that it will stay steady at around that 2 per cent mark for the rest of the year,” Josie Anderson, an economist at Nomura, said, adding that she’s more optimistic than officials in Frankfurt on economic growth. “Our view for the ECB is no more rate cuts.”
Policymakers have emphasised that the bar for another reduction is high. Bundesbank president Joachim Nagel has described the economy as being in a “kind of equilibrium,” with inflation and rates both at 2 per cent.
Hawkish ECB executive board member Isabel Schnabel doesn’t “see a reason for a further rate cut in the current situation,” according to an interview with Reuters published on Tuesday. She warned that tariffs will prove “on net inflationary.”
In a separate interview with Econostream, however, Lithuanian central-bank chief Gediminas Simkus suggested that another decrease in borrowing costs is more likely than not due to downward pressure on prices. December’s meeting is a possible juncture, he said.
The latest euro zone data follow mixed reports from across the region. While figures undershot estimates in France, Italy and Spain, German inflation was slightly above forecast.
The outlook is still uncertain – even after the European Union struck an agreement with the US that will fix tariffs on most exports to the country at 15 per cent. Finnish governing council member Olli Rehn warned at the weekend that there are “more downside risks” to inflation due to a stronger euro, cheaper energy and an easing of core inflation.
“On balance, the inflation report is good news for the ECB. While the headline figure increased slightly and the core number was unchanged, the services reading decelerated again,” David Powell, a Bloomberg economist, said. “We expect services inflation to fall further this year, as wage growth slows. That should unlock another rate reduction in December, as the damage to the economy from US tariffs becomes more visible.”
An account of the ECB’s July meeting offered differing views. Some warned of upside dangers because of the economy’s resilience and elevated domestic price pressures, while most saw risks to the price outlook as broadly balanced. – Bloomberg
