Inflation has slowed in the Eurozone in line with analysts expectations, with the consumer price index coming in at 0.7 per cent in October year-on-year. Core inflation was 0.8 per cent for October year-on-year.
Eurozone inflation is now at its lowest point since November 2009. The slowdown in inflation will be cause for concern for the European Central Bank, whose target rate is rate is two per cent. The data comes a week after the ECB cut its benchmark interest rate to a record low of 0.25 per cent (from 0.5 per cent).
We expect persistent very low Eurozone consumer price inflation, ongoing difficulties in building growth momentum and limited improvement in Eurozone credit conditions will prompt further action from the ECB. The ECB could also be prompted to act if there is significant moves up in market interest rates when the US Federal Reserve finally starts to taper.
Our current view is that the ECB will most likely do another Long-Term Refinancing Operation (LTRO) early in 2014, with a three-year maturity. It is possible that the ECB will eventually go down the negative deposit interest rate route but we suspect they would prefer not to and will only do so if inflation falls appreciably further.