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Euro zone inflation dips below 2%, strengthening rate cut case
Inflation in the euro zone fell below 2% in September for the first time since mid-2021, strengthening the argument for a European Central Bank (ECB) rate cut this month as the three-year effort to curb runaway price growth approaches its conclusion.
According to Eurostat data released on Tuesday, inflation in the 20 countries using the euro dropped to 1.8% in September, down from 2.2% in August. This figure came in lower than the 1.9% forecasted in a Reuters poll, mainly due to falling energy prices and subdued goods prices.
Core inflation, which excludes volatile items like energy and food, also declined, slipping to 2.7% from 2.8%, as slower service price increases contributed to the decrease. This was also below the expected 2.8%.
For several years, price growth has exceeded the central bank’s target, fuelled by surging energy prices, supply chain disruptions following the pandemic, corporate profiteering, and substantial fiscal support, with inflation reaching over 10% by late 2022.
However, a series of record interest rate hikes by the ECB has curbed inflation relatively swiftly, and policymakers are now discussing how quickly they should begin lowering borrowing costs.
The ECB has already reduced rates in both June and September, and on Monday, ECB President Christine Lagarde hinted strongly at another potential rate cut later this month due to encouraging inflation trends.
While a quick follow-up rate cut wasn’t widely anticipated until recently, weak economic data, moderating wage pressures, and inflation figures falling below the ECB’s projections have made the case more urgent.
Adding to the argument for a rate cut, services inflation—a key component of overall price growth—eased slightly to 4.0% from 4.1%, alleviating some concerns about persistent domestic price pressures.
Although rapid wage growth has been driving up service costs, economists have long predicted a slowdown due to softening labour markets, sluggish economic growth, and smaller wage increases.
The biggest factor in the decline of inflation remains falling energy costs, while prices for non-energy industrial goods rose just 0.4% year-over-year, further pulling the overall inflation rate down.
Lagarde has already stated that inflation is now below the ECB’s baseline projections, challenging the bank's previous narrative of persistent price pressures and a return to the 2% target by the end of 2025.
Following Lagarde’s comments, investor expectations for a rate cut increased, with market pricing now indicating an 85% likelihood of a cut on October 17, compared to just 25% at the beginning of last week.
UK economy grows less than expected in Spring
The UK economy grew by less than initially estimated between April and June, according to revised official data.
Growth during this period was adjusted down to 0.5% from the earlier reported 0.6%, primarily due to larger-than-expected declines in the manufacturing and construction sectors.
These figures come as the Labour government, which has prioritised economic growth, prepares to unveil its first Budget in four weeks.
Despite the downward revision, the latest growth data is unlikely to result in major changes to the forecasts by the Office for Budget Responsibility (OBR), which will release its projections alongside the government’s Budget next month. The OBR, an independent body, monitors the government’s fiscal plans and performance.
The Office for National Statistics (ONS), which released the updated figures, highlighted a 3.1% drop in the production of transport equipment between April and June, a sharper decline than the previously estimated 0.7%.
The ONS noted that car manufacturers had scaled back production as they transition toward making electric vehicles.
The construction sector also saw a downturn, driven by a continued slowdown in new home building, although the ONS reported some early signs of stabilisation.
In August, the Bank of England cut interest rates for the first time in nearly four years, lowering them to 5% from 5.25%, following a reduction in inflation. The ONS also revised last year’s economic growth upwards from 0.1% to 0.3%, reflecting stronger income data and updated industry information.
China unleashes boldest stimulus in years to boost ailing economy
China's central bank has implemented a significant interest rate cut in a bid to revive slowing economic growth and alleviate pressure on debt-burdened property owners.
This marks its most decisive intervention since the pandemic to boost the economy. The People's Bank of China introduced a series of measures aimed at lowering borrowing costs. These include a 0.5 percentage point reduction in interest rates on existing mortgages and a cut to the reserve requirements for banks, encouraging new lending.
Governor Pan Gongsheng also announced plans to relax restrictions on borrowing to invest in stocks, leading to a surge of more than 4% in the Shanghai Composite Index shortly after the announcement. Additionally, oil prices saw an increase, with Brent crude rising over 1% to nearly $75 per barrel.
These steps were taken amid fears that China, the world’s second-largest economy, could fall short of its 5% annual growth target—a modest goal by historical standards.
While Pan did not specify the timeline for these changes, he revealed that up to £50 billion in assets could be used to support additional investment on the stock exchange.
To further stimulate the housing market, Pan announced a reduction in the down payment requirement for second homes, lowering it from 25% to 15%. This, combined with lower interest rates, is expected to benefit around 50 million households, cutting their total interest payments by approximately 150 billion yuan (£16 billion) annually.
China’s property market has been grappling with a growing crisis after authorities clamped down on excessive borrowing by developers, leading many to default. This has left property developers and homeowners burdened by high mortgage payments, hampering their ability to invest and grow.
Although Beijing is targeting 5% economic growth for 2024, several investment banks, including Goldman Sachs, Nomura, UBS, and Bank of America, have recently lowered their growth forecasts for China this year.
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