This week was a busy one for economic data. In the Eurozone we saw the European Central Bank (ECB) decide to cut the deposit rate by a further 0.25%, to 3.5%. This was very much in line with consensus expectations and marks the second cut seen this year. The ECB reiterated that they remain committed to bringing inflation back to the 2% target and that future rate decisions would continue to be driven by economic data, with the future path having not been plotted out.

With their own forecasts for inflation falling back to 2.2% next year and 1.9% in 2026, this potentially leaves scope for more interest rate cuts to come. The market certainly seems to believe that further cuts are on the way, with overnight index swaps suggesting that rates could be as low as 2% in the Euro area in 12 months’ time. Cuts are also forecast in the UK and US, potentially falling to 3.5% and 3% respectively over the next 12 months.

Economists and forecasters will have undoubtedly been keenly watching for the latest US inflation data, which continued to fall back toward the 2% target, coming in at 2.5% year on year to August. This represented a meaningful fall from the July reading of 2.9% and was below the consensus forecast of 2.6%. The figure represented the lowest reading since February 2021.

Most components of the reading continue to move in the right direction. The sticking point, however, remains shelter, or housing rents, where the figure remains reasonably elevated at above 5%, and nudged a little higher on the previous reading. This was the major contributor to core inflation remaining higher at 3.2%. Market anticipation no longer appears to be whether the US Federal Reserve will cut rates at their meeting this month, more will it be a 0.25% or 0.5% reduction.

In the UK, meanwhile, we saw the latest set of economic growth figures. Whilst year on year the economy grew 1.2%, this was a little softer than expected, with a rate of 1.4% having been anticipated. Indeed, month on month the economy stalled, with no grow posted. Wage growth figures were also seen, which showed year on year growth of 4% including bonuses, down from the previously revised figure of 4.6%. The two together perhaps provide further scope for the Bank of England to make another cut in the base rate at their next meeting.

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