Has rising inflation taken the pressure off the ECB?
A rise in Eurozone core inflation from 0.8 per cent to one per cent, stable unemployment and strengthening economic confidence may have reduced pressure on the European Central Bank (ECB) to opt for further monetary easing.
Unless inflation falls significantly, it is unlikely that the ECB will feel the need to go down the road of negative deposit interest rates or quantitative easing when it comes to next week's policy vote.
Low energy prices due to a mild winter, combined with weak dometic demand, may explain to a large extent the persistence of weak inflation in the Eurozone. However, as the economy picks up inflation should begin to rise and reach the ECB's target over the medium term.
Senior economist at Berenberg Christian Schulz, said:
The ECB’s 2016 inflation forecast, to be published next week, will reveal how long the ECB expects this normalisation to take. But on the basis of the current mix of data, there is limited reason to expect that it will take too long for the ECB to worry about it de-anchoring inflation expectations.
The Eurozone consumer price index (CPI) remained stable at 0.8 per cent beating analyst expectations of a 0.1 per cent fall. This was all the more surprising considering the lower readings in individual countries such as Germany and Spain, which fell from 1.2 per cent to one per cent and 0.3 per cent to zero per cent respectively.
There was modestly good news on the unemployment front, with unemployment stabilising at 12 per cent in January, down from the record high of 12.1 per cent seen between April and September last year.
Chief European & UK economist at IHS Global Insight Howard Archer said:
Encouragingly, labour markets are showing signs of stabilization or even modest improvement in some of the most stressed countries. Unemployment has been falling modestly recently in Spain and Portugal. Even Greek unemployment has been rising at a much reduced rate. Disappointingly and worryingly though, there was a marked increase in Italian unemployment in January.