Eurozone August CPI Rebounds Above 2%, But Diverging Rate Cut Outlook Weighs on Euro

TradingKey - The Eurozone’s August CPI rose to 2.1% year-on-year, up from 2.0% in July, marking the first time since April that inflation has exceeded the European Central Bank’s (ECB) 2% target. While the rebound strengthens expectations for a hold on rates in September, internal divisions within the ECB over the need for further cuts have weighed on the euro, sending it lower despite the inflation data.

Data released on Tuesday, September 2 showed:

• Headline CPI YoY: 2.1%, above both the prior and expected 2.0%
• Core CPI (excluding food and energy): 2.3%, unchanged from July
• Services inflation: 3.1%, down from 3.2%

Eurozone CPI Year-on-Year, Source: TradingKey

Despite the slight upside surprise, the euro did not rally after the report. Instead, EUR/USD fell further, with the intraday decline widening from 0.50% to 0.71%, and the pair now trading at 1.16286.

Since launching its easing cycle in June 2024, the ECB has cut rates eight times in a row, halving the deposit rate. Last month, the ECB paused, with President Christine Lagarde stating the bank had entered a “wait-and-see” mode.

In a Monday interview, Lagarde said that the 2% inflation target has been achieved, and they will continue to take whatever measures are necessary to keep inflation under control.

Now, policymakers face uncertain inflation dynamics and the question of whether to resume rate cuts — a debate that has sparked divergent signals within the ECB.

• Olli Rehn, Governor of the Finnish central bank, said over the weekend that downside inflation risks dominate, with cheaper energy, a strong euro, and contained services inflation set to push inflation lower.
• Gediminas Simkus, Governor of the Lithuanian central bank, said in a recent interview that borrowing costs could be cut again, with December as a key decision point.
• Isabel Schnabel, ECB Governing Council member, said on Tuesday that upside risks are growing, as solid economic growth and trade disruptions could push costs higher.

Schnabel added:

“I don’t see a reason for a further rate cut in the current situation. Tariffs will prove on net inflationary.”

The latest CPI data reinforces the ECB’s likely hold at its September meeting. HSBC expects the ECB will provide no clear forward guidance this month, but notes that persistent inflation below target could still point to a dovish tilt in the longer term.