Euro-area HICP inflation dropped to 0.7% y/y in January, matching the low-point of October 2013.
The main drag came from energy prices, which dropped 1.2% y/y, while core inflation ticked up a bit to 0.8% in line with our expectations.
At 0.7%, inflation clearly puts more pressure on the ECB to ease policy. Markets reacted with slightly lower rates and a slightly weaker EUR.
We still do not expect the ECB to ease more. Not next week and not in the coming months. At the press conference following the January Governing Council meeting, Mr Draghi identified two triggers for more ECB easing: an unwarranted tightening of money market conditions, and a worsening of the ECB’s medium-term outlook for inflation.
The new staff projections could show a lower inflation projection for 2014 after the recent fairly low numbers, but the key – the medium-term outlook for inflation – will be the 2015 forecast, which looks fairly low already. Thus, we believe the ECB can justify leaving rates on hold even if this year’s inflation projection is revised lower.
In case we are wrong, the most likely ECB response to either deteriorating inflation outlook or tighter monetary conditions would probably be a refi rate cut of 10 to 15 bp.
Nordea