Headline inflation ticks up, but ECB expected to hold
Euro zone inflation edged up to 2.1% in August, according to Eurostat’s flash estimate released Tuesday. The figure came in just above economist expectations of a stable 2% and slightly above the European Central Bank’s (ECB) 2% target. Despite the uptick, the central bank is expected to maintain its current 2% interest rate when it meets in September.
Core inflation — which excludes volatile components like food, energy, alcohol, and tobacco — remained steady at 2.3%. Notably, services inflation, a key metric watched by policymakers, dipped slightly to 3.1%, down from 3.2% in July, marking its lowest rate since March 2022.
Market reacts as ECB adopts cautious stance
The euro dropped 0.6% against the dollar to $1.1640 following the release. Meanwhile, the Stoxx 600 index slipped 0.7% in morning trading. Markets appeared to digest the inflation figures in the context of a cautious European Central Bank that is unlikely to tighten monetary policy in the near term.
Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB is “almost certain” to hold rates steady not only at next week’s meeting, but likely for several months. He noted that the decline in services inflation signals easing domestic price pressures, further justifying a pause in rate hikes.
Trade deal with U.S. provides some relief
The recent EU-U.S. trade deal, signed in late July, has helped reduce some economic uncertainty by averting potential tariff escalations. However, the existing 15% duty on EU exports to the U.S. continues to weigh on economic activity. Eurostat’s July data also showed the euro zone economy grew just 0.1% in Q2, reflecting a slow and uneven recovery.
Irene Lauro, euro zone economist at Schroders, echoed the ECB’s caution. “With trade uncertainty easing, the Eurozone recovery is set to gain momentum as firms ramp up borrowing and investment,” she said. “The resilience in core inflation supports our view that policy normalization has ended, and the ECB will closely monitor growth dynamics before making its next move.”
