The ECB has begun to taper off a two-year campaign against high inflation that began after a rapid reopening of the economy following the COVID-19 pandemic and Russia's conflict over Ukraine.
Inflation in the 20 countries that share the euro currency fell to 2.2% this month, the slowest rate since July 2021 and close to the ECB's 2% target, based on preliminary readings by the European Union's statistics office, Eurostat.
Although this fall is mostly driven by lower energy prices and may reverse later this year, it is still expected to accelerate the decision for a second rate cut by the ECB on September 12 after the first step in June.
"The sharp decline in headline inflation in August makes a tapering in September a foregone conclusion," said Tomas Dvorak, senior economist at Oxford Economics.
Famously hawkish ECB board member Isabel Schnabel seemed to open the door to more easing on Friday, saying that a gradual rate cut may not disrupt the process of deflating inflation as some policymakers fear.
However, the report showed price growth in the services sector, which is closely watched by policymakers because it reflects domestic demand more than external conditions, increased to 4.2% from an already high 4.0%.
This may be the result of a boost from the Olympics in Paris, but also greater spending power by workers after several recent pay rises.
For now, the market expects about six rate cuts before the end of next year, about one more cut than included in the ECB's own economic projections, suggesting that the market is more optimistic about price projections than the ECB.
This is partly because market economists see a bigger drop in inflation this autumn than the ECB's own policymakers are projecting.
Policymakers say they won't be confident in inflation projections until wage growth slows, with Germany's central bank primarily guarding against this risk.
However, with inflation now close to the ECB's target, European zone policymakers are likely to broaden their discussions from a sole focus on inflation to take into account signs of economic weakness.
