ECB's Slow Rate Cuts Risk Pushing Inflation Below Target, Hurting Eurozone Economy

The European Central Bank's slow pace in cutting interest rates could push inflation below its 2% target, harming the eurozone's fragile economy. Markets suggest inflation will fall below the target earlier than ECB's projections. Investors worldwide are concerned about below-target inflation, and weaker growth may necessitate deeper rate cuts.

The European Central Bank (ECB) is at risk of pushing inflation below its 2% target by cutting interest rates too slowly, which could harm the eurozone's fragile economy, according to traders.

In the swaps market, data from Danske Bank for Reuters suggests inflation will fall below the ECB's target from January, much earlier than the bank's late 2025 projection. With inflation currently at 2.2%, this month may see a dip below target before a rise back, but investors warn of prolonged below-target inflation if rate cuts aren't accelerated.

The ECB has been combating inflation that hit double digits less than two years ago. Aggressive rate hikes eased price pressures, leading to an easing cycle begun in June, with the last cut earlier this month. However, slower rate cuts through next year could keep inflation below target for too long, complicating future efforts to raise it. Recent data showing a contraction in eurozone business activity in September have fueled expectations for an October rate cut, despite ECB policymakers' reservations.

(With inputs from agencies.)