FRANKFURT (Reuters) -Euro zone inflation edged up a touch in August, staying close to the European Central Bank’s 2% target and likely firming up market bets that interest rates will remain unchanged in the near term.
Inflation in the 20 nations sharing the euro picked up to 2.1% last month from 2.0% in July, just above expectations for 2.0% in a Reuters poll, on a pick up in unprocessed food prices and a smaller drag from lower energy costs, data from Eurostat showed on Tuesday.
A more closely watched figure on underlying prices, which exclude volatile food and fuels prices, meanwhile held steady at 2.3%, above expectations for fall to 2.2%.
The figures confirm the ECB’s own projection for inflation to oscillate around target through the end of the year, as muted goods inflation and moderating energy prices offset still robust growth in the price of food and services.
This relative calm in price growth is why markets expect steady interest rates through the rest of the year, even if policymakers are still likely to debate whether more easing may be needed on top of the two percentage points of rate cuts made since mid-2024.
Such a debate could pick up pace in early 2026 as price growth is expected to undershoot the target, albeit temporarily, raising worries that too low inflation could get entrenched, much like it did in the pre-pandemic decade.
Anticipating such a debate, ECB board member Isabel Schnabel argued on Tuesday that risks to inflation were actually skewed towards higher readings and she saw no risk of price growth getting stuck under target since economic growth was healthy and trade turmoil would exert upward pressure on costs.
“It is important to acknowledge that we cannot fine-tune inflation in a way that it is always at 2% in a shock-prone world,” Schnabel told Reuters. “We can tolerate moderate deviations of inflation from target in either direction.”
Other policymakers are less confident in the outlook and continue to openly discuss the possibility of more easing further out.
The ECB will next meet on September 11 and economists overwhelmingly anticipate no change in the 2% deposit rate.
Expectations, however, diverge further out and some still anticipate an ‘insurance’ cut either at the end of the year or early 2026 to signal that persistent undershooting of inflation will not be tolerated.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
Comments