WASHINGTON: Inflation in the eurozone has hit its highest level since 2014, but economists remain convinced the European Central Bank will unleash another round of monetary stimulus in March.
Headline inflation across the single currency area rose in the year to January to 0.4 per cent from 0.2 per cent the previous month, according to Eurostat, the European Commission’s statistics bureau. The core measure of inflation, which strips out more volatile price changes for goods such as food and oil, rose from 0.9 per cent to 1.1 per cent.
While headline inflation has not been as high since October 2014, it remains well below the ECB’s target of just below 2 per cent. Price pressures will almost certainly become more subdued in the months ahead as the latest slump in oil costs are factored into the index.
The ECB looks set to react to the fall in oil prices and the China-led slowdown in emerging markets after the central bank’s president Mario Draghi said his policymakers would “review and possibly reconsider” their policy stance at their next policy vote, held in early March.
The Bank of Japan’s decision earlier on Friday to follow the ECB’s lead into negative territory and cut a key interest rate to minus 0.1 per cent has raised the prospect of more action from officials in Frankfurt.
“The ‘currency wars’ may have entered a new phase. The Bank of Japan’s announcement of a negative interest rate, with its communication today leaving the proverbial door open for further reductions, has seen the yen fall sharply,” said Ken Wattret, economist at BNP Paribas. “The exchange rate implications for the eurozone of the BoJ’s actions increase the already high likelihood of a further deposit rate cut by the ECB in March and will add to speculation of a bigger than 10 basis point cut.”
The ECB became the first major central bank to enter negative territory and has since cut its deposit rate to minus 0.3 per cent. The shift below the zero bound is widely credited with weakening the euro and improving conditions for the region’s exporters.
