Eurozone inflation edged up slightly in August; is an interest rate cut unlikely at the ECB's September meeting?

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The eurozone’s inflation rate edged up slightly in August and once again exceeded the European Central Bank’s target, reinforcing expectations that the bank will keep rates unchanged at next week’s meeting.

Data released on Tuesday showed that the eurozone’s CPI rose 2.1% year-on-year in August, up from 2.0% in July, in line with economists’ expectations. Core inflation, which excludes volatile items such as energy and food, remained steady at 2.3%. The closely watched increase in service prices slowed to 3.1%.

This report will confirm the ECB’s view that they can pause rate cuts again at the meeting on September 11. ECB President Lagarde has previously reiterated that the central bank is currently in a “good place,” and investors are no longer convinced there will be more rate cuts this year.

The ECB kept the deposit rate unchanged at 2% in July. The latest inflation data, along with the resilience shown by the economy after the US-EU tariff agreement, may make policymakers more satisfied with the current pace of inflation and the economic situation.

Widespread Support from Policymakers to Stand Pat

Several ECB policymakers have recently stated their support for maintaining stable rates in the current environment. Bundesbank President Joachim Nagel described the current economy as being in “a certain balanced state” with both inflation and rates at the 2% level. Josie Anderson, an economist at Nomura, said in an interview:

“We think the overall inflation situation will be stable around 2% for the rest of this year. Our view on the ECB is that there will be no further rate cuts.”

Hawkish ECB Executive Board member Isabel Schnabel’s position is even more explicit; she said “there is no reason for further rate cuts under current circumstances,” and warned that tariffs would “have a net inflationary effect.”

The Door to Rate Cuts Not Completely Closed

Although pausing rate cuts is the mainstream view, some officials still leave room for future easing, citing uncertainties ahead. Lithuanian central bank governor Gediminas Simkus hinted in an Econostream interview that because of downward price pressures, the possibility of another rate cut is “greater than not cutting.” He believes the December meeting is a possible time point.

Bank of Finland governor Olli Rehn also warned last weekend that, due to a stronger euro, falling energy prices, and a cooling of core inflation, there are “more downside risks” to the inflation outlook. Minutes from the ECB’s July meeting also showed differing views; some members warned that due to economic resilience and high domestic price pressures, there are upside risks to inflation, but most believe the risks to the price outlook are “broadly balanced.”

The latest overall eurozone data masks divergent performances among member countries. Previous data showed that France, Italy, and Spain’s inflation figures were below expectations, while Germany’s inflation rate was slightly above expectations. This highlights that the economic outlook for the entire eurozone remains uncertain.

Analyst David Powell noted in a report that the latest inflation report “is good news for the ECB,” since services inflation slowed once again. He expects that as wage growth slows, services inflation will drop further this year, which “should create conditions for another rate cut in December, when the negative effects of U.S. tariffs on the economy will become more apparent.”

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