ECB to Assess Impact of Weak Eurozone Economy on Inflation Ahead of Rate Decision

The Eurozone economy is showing weaker performance than anticipated, prompting the European Central Bank (ECB) to assess its impact on consumer prices at its upcoming meeting, according to ECB Executive Board member Frank Elderson. Speaking to Slovenian newspaper Delo, as reported by Bloomberg, Elderson stated that recent data indicates economic growth risks are materializing, and this will be a crucial factor when evaluating the inflation outlook.

Elderson, who seldom speaks publicly about monetary policy, emphasized the importance of an open and thorough discussion during the ECB's October 16-17 meeting in Slovenia. He mentioned that members would come prepared to consider different perspectives and opinions. The meeting is expected to result in a decision on reducing borrowing costs, marking the third rate cut this year, as central bankers react to the weaker economic indicators and potential risks to the labor market.

The ECB has noted that inflation is slowing faster than projected, with figures in September dropping below the 2% target for the first time since 2021. ECB President Christine Lagarde hinted last week at another rate cut, expressing confidence in reaching the inflation target on schedule. Similarly, French central banker Francois Villeroy de Galhau suggested that another rate reduction was "very likely" during next week’s gathering.

Ahead of the meeting, Elderson highlighted the ECB's data-driven approach, reaffirming that decisions will be made on a case-by-case basis. He underlined the central bank's intention to continue easing its restrictive policy if inflation trends support their forecast of reaching the 2% target by the second half of 2025. However, he stressed the need for flexibility in the pace of future rate adjustments.

Despite the decline in overall inflation, service sector inflation remained elevated at 4% in September. Elderson predicted a gradual slowdown in service inflation in the coming year. Nonetheless, he acknowledged that geopolitical tensions, such as potential escalation in the Middle East, could impact energy prices and transportation costs, leading to trade disruptions and upward pressure on prices.

Elderson also outlined other potential risks to inflation. He cautioned that wage increases exceeding expectations or a rise in profit margins could drive prices higher. Conversely, inflation could face downward pressure from factors such as weaker-than-expected demand or an unexpected economic downturn in the United States and other global regions.

Elderson noted that economic growth within the eurozone is currently below the ECB’s forecasts. He explained that a range of data showed reduced household consumption and lower business investment levels than initially predicted. This divergence from expectations has contributed to the central bank's cautious approach as it prepares for next week’s discussions.