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Lower core inflation re-fuels strong additional ECB stimulus bets - ING

FXStreet (Delhi) – Peter Vanden Houte, Research Analyst at ING, notes that according to Eurostat’s flash estimate, HICP inflation remained stable in November at 0.1% year-on-year, below the consensus expectation for a 0.2% year-on-year increase in consumer prices.

Key Quotes

“The low oil price continues to exert downward pressure on headline inflation, with the energy component falling 7.3% year-on-year. This impact is likely to soften a bit in the coming months on the back of a less favorable base effect.”

“The bigger surprise was the fall in core inflation to 0.9% year-on-year from 1.1% in October. While this figure has showed some volatility lately, it basically continues to hover around 1% (this would also correspond with headline inflation, once the oil price stabilizes), which is way below the ECB’s inflation target for a headline inflation below but close to 2.0%.”

“Although consumption has picked up over the last quarters, benefitting especially the services sector, this hasn’t reflected yet in services price inflation. Somewhat unexpectedly services prices increased only 1.1% year-on-year, a deceleration from the 1.3% increase seen in October. This clearly reflects Mario Draghi’s worry that core inflation rates remain stubbornly low.”

“This was the last important data release before the ECB’s meeting of the Governing Council tomorrow. And if anything, the figures give the doves within the Council the ammunition to go for the full Monty.”

“Indeed, caution in further easing measures, disappointing market expectations, could cause the euro to strengthen and bond yields to rise, thereby implying unwarranted tightening of monetary conditions. We expect the ECB to cut the deposit rate by at least 15 Bp tomorrow, extend both in size (increase of monthly purchases by about €10 Bn), scope (broadening to regional debt) and duration (extending it at least to January 2017) its asset purchase program. A not yet anticipated refi rate cut to 0% might be the icing on the cake.”

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