Inflation in the 20 European Union countries that use the euro fell sharply to 2.2 per cent in August, opening the door for the European Central Bank to cut interest rates as the ECB and the US Federal Reserve prepare to lower borrowing costs to support growth and jobs.

The August figure was down from 2.6 per cent in July, according to figures on Friday from European Union statistics agency Eurostat.

This was the lowest since July 2021 and also matched expectations.

Energy prices fell in August by three per cent, helping lower the overall figure, while inflation fell to two per cent in Germany, the eurozone’s largest economy.

The monthly figure is close to the ECB’s target of two per cent, the level considered best for the economy.

Not all the EU’s 27 countries use the euro.

Economists expect the ECB to cut its key rate by a quarter point from 3.75 per cent at its September 12 meeting, while the Fed is expected to cut rates from a 23-year high of 5.25 per cent-5.5 per cent at its September 17-18 policy meeting.

The lower German inflation figure “tilts the balance toward a September rate cut”, said Carsten Brzeski, global chief of macro at ING bank.

“Fading inflationary pressure combined with fading growth momentum offer an almost perfect macro backdrop for another rate cut.”

Economists caution the path downward to two per cent might yet be a bumpy one.

The ECB expects inflation to fluctuate but to fall to its target by the end of 2025.

Central banks sharply raised interest rates to counter an outburst of inflation caused by a spike in energy prices after Russia’s invasion of Ukraine, and by clogged supply chains for parts and raw materials as the global economy bounced back from the COVID-19 pandemic.

Europe’s inflation has fallen a long way from the 10.6 per cent it reached in October 2022.

But higher rates can weigh on growth as well, and those concerns have come to the fore in Europe and the US.

While unemployment rates remain low in both economies, central bankers are becoming wary of keeping rates too high for too long and seeing people lose their jobs or the economy tip into recession.

The eurozone grew only a modest 0.3 per cent in the second quarter. 

The ECB made a first rate cut in June, then hit pause in July and has since been waiting for confirmation the coast is clear to make more cuts.

with DPA

This post was originally published on Michael West.