Eurozone: higher inflation in December; core to remain low during 2017 - Danske Bank

According to analysts from Danske Bank, despite today’s higher than-expected inflation numbers from the Eurozone, they European Central Bank will announce a third QE extension this year. 

Key Quotes: 

“Euro area inflation increased to 1.8% y/y in January, which is the highest rate since February 2013 and above consensus at 1.5% y/y. The rise in inflation was driven mainly by energy and food price inflation, which together had a contribution of 1.1pp up from 0.5pp in December.”

“Higher inflation was seen across countries – Spanish inflation was 3.0% and significantly above the ECB’s 2% target – hence, the ECB can conclude that it is not only German inflation that is higher. That said, it still remains to be seen whether the rise in inflation will affect the medium-term horizon and whether it is a durable, self-sustained convergence.”

“We expect core inflation to stay low at 0.9% on average this year, primarily as labour market slack in the periphery countries should keep wage growth subdued.”

“The bottom line is that we do not expect the higher inflation figures to change the ECB’s monetary policy stance, as the underlying price pressure is still weak. Although some ECB members have started to express a more hawkish stance recently, consensus in the ECB seems to be that core inflation also needs to rise before the ECB will discuss tapering. We still believe the ECB will announce a third QE extension this year.”