Inflation rates for consumer prices in the eurozone have decreased to below 2 percent for the first time in three years, prompting discussions about a potential third interest rate cut from the European Central Bank (ECB) within a four-month span.

Recent official statistics revealed that annual price growth in the euro area fell from 2.2 percent to 1.8 percent in September, largely due to significant decreases in major economies like France and Italy. The ECB aims for a 2 percent annual inflation target, marking this dip as the first instance of inflation falling below the threshold since July 2021.

There is mounting pressure for ECB policy makers to reconsider monetary policy this month in response to declining inflation rates and various indicators suggesting sluggish economic growth throughout the region. The next decision meeting is slated for October 17.

Frederik Ducrozet, an analyst at Pictet Wealth Management, expressed the need for the ECB to implement “a more rapid dial-back of monetary tightening.” This year, the central bank has already reduced rates by a quarter percentage point in both July and September.

Over the past two years, average inflation across the eurozone has plummeted from a peak exceeding 10 percent to the current 1.8 percent, primarily due to the easing of impacts from a global energy crisis and supply chain challenges. In specific countries, inflation is now recorded at 1.8 percent in Germany, 1.5 percent in France, and 0.8 percent in Italy. Economists from Capital Economics predict that average price growth will further decline to 1.6 percent next year attributed to falling energy prices and a decelerating economy.

The eurozone, led by Germany, is experiencing a pronounced downturn in the manufacturing sector coupled with a weakening job market, enhancing the argument for monetary stimulus.

Additional data showed that manufacturing output in the 20-nation bloc experienced its steepest decline this year last month, continuing a trend of no growth over the previous 18 months. The purchasing managers’ index (PMI) for the euro area dropped from 45.8 to 45.0 in September, marking the lowest level in nine months; a PMI value below 50 signifies contraction. Germany’s PMI declined even more sharply to 40.6, reflecting the fastest drop in hiring within the manufacturing sector in four years.

ECB President Christine Lagarde noted on Monday that the weak economic data will influence decisions at the upcoming monetary policy meeting.

Analysts at Deutsche Bank have adjusted their predictions for monetary easing, forecasting a quarter-point rate reduction at every meeting until mid-2025, potentially bringing borrowing costs down from the current 3.5 percent to as low as 2 percent next year.

Mark Wall, chief economist at Deutsche Bank, stated, “A 25 basis point rate cut in October would better balance the risks related to inflation moving forward, although rates would still remain restrictive. We anticipate that there will be a temporary increase in inflation in the coming months due to energy base effects, but the recent rapid decline in inflation makes it more likely that the ECB will adjust its forecasts downwards in December and anticipate inflation reaching the target sooner than the fourth quarter of 2025.”

Some ECB governing council members may highlight persistent core inflation, which has reduced from 2.8 percent to 2.7 percent this month, and persistent services sector inflation, which saw a slight decrease from 4.1 percent to 4 percent, as justifications for not cutting borrowing costs this month.

However, a majority of economists dispute this view. Analysts at Nomura remarked, “Inflation is no longer a pressing issue in the euro area. A lack of demand is eroding firms’ pricing power, leading them to find it increasingly difficult to transfer higher input costs to consumers, which will further alleviate consumer inflationary pressures in the coming months.”