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Eurozone Inflation Troubles ECB

H.S. Borji
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Eurozone Inflation Troubles ECB

Eurostat has just released the February inflation figures for the Eurozone. The Consumer Price Index (year over year for February) came in at 0.8%, this was anticipated at 0.7%, down from the previous January level of 0.8%. Likewise the Core Consumer Price Index (ex. Fuel / Housing) came in at 0.8%, the consensus prediction on this was 0.7% against a previous of 0.8%

The European Central Bank (ECB) is heading into a key Governing Council meeting next week. Speculation is mounting that the ECB will be forced into cutting interest rates one more time in order to stimulate the weaker Eurozone economies.

The ECB’s stated target inflation level for the Eurozone as a whole is 2%. Today’s figure is a long way short of that and more troublingly it is clearly not heading in the right direction fast enough. Mario Draghi, Head of the ECB, has admitted that deflation is a very real prospect for Europe and this is likely to form the narrative for next week’s monetary policy deliberations.

The Euro rapidly jumped 20bps this morning following the surprise growth in Germany’s retail sales figures, markets had expected January’s numbers to show a fall of 1.2% whereas they in fact came in positive with 0.9% growth. A further interest rate cut is the last thing that Germany needs right now as it’s economy is clearly moving in the right direction. Consistently positive economic data is evidence that the recovery for Germany has begun, but it is still early days and the recovery is in a very fragile stage. Excessive stimulus at this juncture will likely prove detrimental to Germany in the long run.

The ECB therefore has a balancing act to maintain. They have stalled on adding monetary stimulus to the Eurozone in order to preserve growth stability in the performing economies. Possibly rightly so. It will however be very difficult in the light of this morning’s inflation data to further postpone the next interest rate cut.

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