Near zero Eurozone inflation gives ECB stronger case for fresh stimulus

Inflation in the Eurozone remained at 0.1%, the European Union’s statistics office in Luxembourg said on Wednesday. Economists expected that the rate would rise to 0.2%. The European Central Bank (ECB) targets a rate of 2% to ensure stability of the money supply.

We now await the response of ECB President Mario Draghi to the data that tops a series of reports, from manufacturing to unemployment, highlighting the slowly improving, yet delicate, state of the economy. With a slowdown in emerging markets weighing on the recovery, and inflation far short of the ECB’s mandate, Draghi has virtually promised to cut interest rates and expand asset purchases at the ECB meeting on 3 December (1).

The largest detractor from the CPI rate came from a 7.3% year-on-year decline in November. The ECB had cautioned against taking too much stock of the effects from volatile energy prices.

Meanwhile, data from Eurostat showed that core inflation, which has come under closer scrutiny because it strips out the impact of energy, food and tobacco prices, eased to 0.9% from an upwardly revised 1%, also missing analyst expectations (2).

Draghi is expected to announce on Thursday that the ECB will strengthen its €1.1 trillion bond-buying programme. Economists also expect policymakers to cut the ECB’s deposit rate further into negative territory (3).

The euro weakened further against the dollar and European equities rose, as investors reacted to the weak inflation figures (4).

Investors will question what it could mean for the US Federal Reserve, which is expected to raise interest rates at the end of the year. November non-farm payroll numbers from the US on Friday is the next major data point for markets (5).