Eurozone keeps inflation under control, ECB hesitant to cut rates

2025-08-29 18:17:00, Ekonomi CNA

The annual inflation rate showed no signs of rising in three of the eurozone's largest economies, keeping alive the possibility of a rate cut at the next meeting of the European Central Bank (ECB).

In France, consumer price inflation, harmonized according to EU standards, fell to 0.8% in August, from 0.9% in July, according to data published on Friday by the French statistics institute. The further decline in inflation takes it well below the 2% level that the ECB considers optimal. “This is a ray of hope for those who favor looser monetary policies,” wrote Claus Vistesen of Pantheon Macroeconomics.

In Italy and Spain, annual inflation remained unchanged this month, at 1.7% and 2.7% respectively, according to data published on Friday.

Data from France showed that food prices remained stable, while energy prices fell more slowly than in July. This suggests a decline in core inflation – a key indicator that excludes the most volatile components. According to LSEG Refinitiv data, markets expect the ECB to keep its main deposit rate at 2.0% in September, although some members of the Governing Council have underlined that all options remain open. A small number of investors predict a cut to 1.75%.

The French economy grew relatively strongly in the second quarter, official data showed on Friday. Spain, boosted by strong tourism and high migration flows, continued to outperform most rich countries. However, growth in the eurozone's major economies is expected to slow in the second half of the year, and a sharper-than-expected slowdown could prompt the ECB to cut borrowing costs to boost economic activity.

French household spending fell in July, other data showed, leaving little hope for a recovery in consumption. The country has also been grappling with a political deadlock since last summer, when President Emmanuel Macron’s party lost its majority in the National Assembly after snap elections. Currently, a minority government led by Prime Minister François Bayrou faces a no-confidence vote early next month — which it is likely to lose — further delaying budget reforms needed to rein in a deep public deficit.

Germany's economy shrank 0.3% in the second quarter and there are other signs of weakness. The number of unemployed people exceeded 3 million this month, according to data on Friday. The fragile labor market and gloomy economic outlook have significantly reduced consumer confidence over the summer. According to Commerzbank economist Joerg Kraemer, trade tariffs imposed by the United States will hit the export-oriented economy even harder, while European neighbors cannot compensate for the decline in demand from the American market.

"The recent strengthening of the euro, which is likely to continue in the coming months, especially against the US dollar, will reduce the competitiveness of European products in the global market," he warned.

Keeping interest rates at the same level could further strengthen the euro, which has risen by over 10% against the dollar since the beginning of the year. Further weakening of the dollar is possible if the US Federal Reserve decides to cut interest rates at its next meeting, a scenario for which the probability has narrowed in recent weeks./ Monitor.al