Inflation slowed more than expected in December and was further away from the ECB target, reinforcing forecasts that interest rates might not rise this year.
According to Eurostat, prices in the eurozone in December increased by 1.6 percent compared to the same period last year, down from 1.9 percent in November. Inflation was constrained by a sharp slowdown in energy prices. The unexpected drop in inflation below the ECB target complicates plans for a possible increase in interest rates. Recall, the regulator promised in December to keep rates at current record-low levels, at least until next summer and did not try to change market expectations that the first increase in interest rates would occur only in early 2020. The December figures reinforced the view that it is not expected to increase this year.
Immediately I recall the recent statement by the ECB official Benoit Coeure that interest rates will remain low until inflation reaches its goal. While there is no reason for this. Although the recent acceleration in wage growth might well have been, fears that inflation in the energy sector is likely to continue to decline, overall inflation is likely to fall to about 1 percent by the middle of the year.
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