Euro zone inflation falls to three- year low, raising expectations of ECB rate cut

Brussels: Inflation in the euro zone dropped to a three-year low of 2.2 percent in August, according to flash estimates released by Eurostat on Friday. This decline from 2.6 percent in July aligns with economists' forecasts, fueling speculation that the European Central Bank (ECB) may introduce a rate cut in September.

The core inflation rate, which excludes volatile components like energy, food, alcohol, and tobacco, also decreased slightly to 2.8 percent in August, down from 2.9 percent in July. This figure matched the expectations of economists polled by Reuters.

Following the inflation data release, the euro continued its slide against the British pound, trading 0.1 percent lower at 0.8408 pounds. However, the euro made a modest gain of 0.04 percent against the U.S. dollar, trading at 1.1083 dollars, as investors anticipated a potential rate cut from the Federal Reserve in September, signalling the start of monetary easing in the current cycle.

The drop in inflation was particularly evident in Germany, the euro zone's largest economy, where price increases slowed more than expected to 2 percent for the month on a harmonised basis within the eurozone.

Economists at ING predict that core inflation in the euro zone will remain stubbornly above 2.5 percent for the remainder of the year, driven by persistent price pressures in goods and services.

Market analysts are now fully anticipating that the ECB will lower interest rates by an additional 25 basis points in September, following the institution's first rate cut in June. Another 25 basis point reduction is expected before the end of the year as the ECB continues its efforts to manage inflation within the euro zone.