Falling energy prices are driving inflation in the euro area below the 2% target.

Inflation in the Eurozone fell below the 2% target for the first time since mid-2021, paving the way for European Central Bank (ECB) to cut interest rates again this month.

Annual inflation fell to 1.8% in September, down from 2.2% in August and below the 1.9% expected by economists.

Falling energy prices were the biggest contributor to the lower overall rate, with energy prices falling six percent over the year.

But the release also showed signs of progress on measures of core inflation. Core inflation, which strips out more volatile components, fell to 2.7 percent from 2.8 percent previously.

Services inflation, which policymakers have identified as a key indicator of domestic price pressures, eased to 4.0 percent from 4.1 percent the previous month.

With the inflation announcement coming shortly after business surveys pointed to further weakness in the eurozone economy, analysts said the case for another rate cut in October was increasingly compelling.

“The time for gradualism is over,” said Natasha May, global market analyst at JP Morgan Asset Management.

The ECB cut interest rates for the first time since 2020 in July, followed by another cut last month.

This brought the main interest rate to 3.5%, down from a peak of 4.0% reached last September.

Christine Lagarde, the president of the ECB, has been unwilling to commit to a specific rate path going forward.

Still, economists believe a stuttering economy will force the central bank into action.

According to S&P production Purchasing Managers’ Index (PMI), released this morning, activity in the Eurozone fell to a nine-month low in September.

The survey showed that demand remained very weak, with new orders falling at the fastest pace since last December. The PMI also pointed to easing price pressures.

ECB officials indicated a “changed” outlook at last month’s meeting. In updated forecasts, published alongside the rate decision in September, the ECB estimated the bloc would grow by just 0.8% this year.

“With growth under pressure now, it looks like the door is open for the ECB to move faster,” said Bert Colijn, economist at ING.

Markets now believe the ECB will cut rates twice this year, in October and December.

After AM city

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