In Focus: the eurozone's current inflation

The eurozone’s current inflation rate is above the ECB’s desired level. However, further policy easing should still be possible in order to support the weak regional economy given the moderating trend of inflation and given that inflation expectations appear well anchored.

Although still above the ECB’s 2.0% target rate, since the start of the year, inflation in the eurozone has exhibited a moderate declining trend. Moreover, with inflation expectations considered to be under control and the eurozone’s economy still under stress, further cuts to the ECB’s main policy interest rate may be possible in the coming months.

With the subsequent global economic recovery, inflation picked up in 2010 and 2011. In 2012 however, despite the region’s ongoing sovereign debt crisis, inflation did not subside by much, thanks in large part to persistently high energy prices. Inflation rates that have remained stuck above the ECB’s official 2.0% target rate have been a constrictive factor for ECB policy, in terms of the extent of easing that could be undertaken. That said, ECB policy is clearly highly accommodative with the main refinancing rate already at a record low
level of 0.75% and with the announcement of a range of less conventional easing measures; including most recently, the outlining of a mechanism for Outright Monetary Transactions (OMT). Looking ahead, further policy easing should be possible in the coming months. The main reasons for this are: 1) although somewhat above the ECB’s desired level, inflation has been on a moderate declining trend in the past few months, with the ECB also believing that broader inflation expectations are ‘well anchored’; and 2) the continuing weakness of the eurozone economy with early signs that this weakness is spreading to the once distinctively robust-looking German economy.

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