Euro zone inflation remains on benign path, easing need for rate cut

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FRANKFURT (Reuters) -Euro zone inflation remains on a benign path, a raft of data indicated on Friday, supporting economists’ bets that it will hold around target for years to come and no more European Central Bank rate cuts are needed.

Inflation has been hovering around the ECB’s 2% target for most of this year and policymakers see it near this level over the medium-term, a rare success for a bank that struggled with ultra-low inflation for a decade before a post-pandemic surge to above 10%.

Inflation in France held steady at 0.8% this month, eased a touch to 3.1% in Spain, and was broadly unchanged in many of Germany’s largest states, keeping the overall euro zone figure, to be published on Tuesday, on course for a steady reading at 2.1%.

NO MORE RATE CUTS SEEN

Meanwhile, consumers surveyed by the ECB last month see inflation in the next year at 2.8%, just above the 2.7% predicted a month earlier, while price growth three years ahead was seen steady at 2.5% and five years out at 2.2%, the ECB said.

The figures, based on a survey of 19,000 adults in 11 euro zone nations, are also consistent with policymaker views that inflation is now firmly around target and will hold there for the next few years, even if some oscillation around this baseline is possible.

This is why financial markets see almost no chance of a rate cut next month and see only a one-in-three chance of any further easing next year, with most economists betting that the interest rate cycle has bottomed out.

RATE CUT DEBATE

Still, the ECB’s debate over rate cuts is unlikely to end for some time.

Falling energy prices are likely to drag inflation below target in 2026 and some policymakers fear that low readings could weigh on expectations and perpetuate anaemic inflation.

But the ECB normally looks past energy price-induced volatility and focuses on the medium term. Philip Lane, the bank’s chief economist, has also warned that price pressures excluding energy were still too high.

But Lane also said that a slowdown in domestic inflation was on the way and the ECB’s survey on income and spending bets also supported this narrative. Consumers’ income growth expectations in the next year rose to 1.2% from 1.1%, while expected spending growth was unchanged at 3.5%.

While the ECB is keeping the door open to more rate cuts, it made clear it was in no hurry to change policy and some policymakers even argue the bank may be done cutting, after halving the deposit rate in the year to June.

(Reporting by Balazs Koranyi; Editing by Alex Richardson)