Eurozone inflation falls to 2.2% in August

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Eurozone inflation fell sharply to 2.2 per cent in August, due to lower energy prices, bolstering expectations that the European Central Bank will reduce interest rates next month.

Friday’s figure was in line with a forecast of 2.2 per cent in a Reuters poll and last month’s rate of 2.6 per cent.

It came after Germany and Spain reported bigger than expected reductions in August in figures this week.

France also reported a fall in inflation, though less than expected, earlier on Friday.

Markets are betting on a quarter-point reduction in the ECB’s benchmark interest rate to 3.5 per cent at its September 12 meeting, as inflation nears the bank’s 2 per cent target.

The ECB already cut rates by a quarter point in June, while the Bank of England did so this month.

Traders in swaps markets are pricing in two or three more quarter-point rate cuts this year.

Despite the fall in energy prices in Friday’s figures, an uptick in services inflation to 4.2 per cent may add to rate-setters’ concerns, given wage growth in Germany and elsewhere.

After Friday’s figures were released, the yield on German Bunds — which move inversely to prices and reflect eurozone interest rate expectations — was down 0.01 percentage points at 2.35 per cent. The euro was unchanged on the day at $1.1076.

The US Federal Reserve is also expected to cut its benchmark rate for the first time in more than four years in September.

ECB chief economist Philip Lane signalled this month that further rate reductions were likely in Europe.

He warned that keeping interest rates “too high for too long would deliver chronically below-target inflation over the medium term”, while warning that a return to the ECB’s 2 per cent target was not yet certain.

Isabel Schnabel, an ECB executive board member, indicated on Friday she was also open to cuts, but said the central bank “should proceed gradually and cautiously” on lowering rates.

Separate figures published on Friday showed that the Eurozone labour market remains robust, with a marginal fall in the seasonally-adjusted unemployment rate to 6.4 per cent in July from 6.5 per cent the month before.