Illustration of food items placed on the belt of a cash register in a Leclerc supermarket in Valence, France, April 4, 2025.
Nicolas Guyonnet | Afp | Getty Images
Euro zone inflation cooled to 1.7% in January, flash data from statistics agency Eurostat showed Wednesday.
Economists polled by Reuters had expected the inflation rate to dip to 1.7%, down from 2% in December.
Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, stood at 2.2% in January, down a touch from the 2.3% seen in the year to December.
The latest data shows the key inflation rate has now dipped below the European Central Bank’s 2% target, meaning it’s likely to steer clear of any more rate cuts for the foreseeable future.
Cautious approach
The central bank next meets on Thursday and is expected to hold its benchmark interest rate at 2%. Economists expect no change in the coming months either, but note that there are a few factors that might change the ECB’s stance.
Lorenzo Codogno, founder and chief economist at Lorenzo Codogno Macro Advisors, said these could include an escalation of geopolitical tensions, a sharp appreciation of the euro, or somewhat higher-than-expected inflation prints.
“The ECB remains in a ‘good spot’ or ‘good place,’ but ECB speakers may become more reluctant to use such wording amid global uncertainty and fragility,” he said in emailed comments Tuesday.
“I continue to see a small downside risk for policy rates in the near term and some upside risk in the medium term. Yet the baseline scenario remains the same: no change in 2026 and 2027, with the bar for action high,” he noted.
Paul Hollingsworth, head of DM Economics at BNP Paribas Markets 360, agreed that the threshold for any policy action this year was high, and the next move could well be a hike.
“We see a high bar for any policy action, and stronger-than-anticipated underlying price pressures suggest the ECB will favour a steady hand for a prolonged period,” he said in emailed comments last week.
“We continue to see the next move as a hike, in the third quarter of 2027, by which point we expect more evidence of stronger domestic price pressures stemming from the impact of higher defence and infrastructure spending,” he said.
