Archive

EA: HICP Median Splits Higher

• The final EA HICP inflation print confirmed the flash’s slight slowing to 2.8% for Jan-24. Housing energy price base effects offset most of the negatives in food and transport.
• Underlying inflation measures are slowing y-o-y, but the monthly impulse moved sharply higher in some cases, including the median for Germany and Spain.
• Split signals on underlying pressures confuse the optimal policy response. Sustaining higher numbers should delay cuts, but a sub-2% convergence would mean the opposite.

By Philip Rush

EA: Inflation Sails Smoothly Downstream

• Flash EA inflation matched consensus expectations for the first time since Jul-23 as it slowed by 18bps to 2.75%. The level is close to views held throughout the past year.
• Services inflation remains uncomfortably persistent for the ECB and little changed at 3.98% in Jan-24. High wage inflation is stoking this domestic inflationary source.
• The ECB wants to see more progress in the disinflationary process before cutting. Sticky service prices don’t help that, further damping the likelihood of an imminent rate cut.

By Philip Rush

EA Stagnation Skirts Recession

• The Euro area appears to have skirted a technical recession with a flat GDP in Q4. Even if revised down, the activity trend has been broadly stagnant for five quarters.
• Only Ireland is in a proper recession, but Germany’s size means it subtracted more from the EA in Q4. Surveys have been recovering and remain robust for employment.
• Resilient demand relative to supply suggests policy is not overly tight, which should discourage rate cuts from matching the deep mean reversion that markets price.

By Philip Rush

ECB Refi Rate 4.5% (consensus 4.5%) in Jan-24

• The ECB's decision to maintain key interest rates unchanged is influenced by the current stagnation in economic activity and a declining trend in inflation, with an expectation of gradual easing in line with the medium-term target.
• Future interest rate decisions will hinge on the continual assessment of inflation, economic data, and the effectiveness of monetary policy transmission, reflecting a data-dependent and responsive approach.
• The ECB remains vigilant about downside risks to economic growth and upside risks to inflation, emphasizing its readiness to adjust monetary policy instruments to ensure the return of inflation to the medium-term target and smooth policy transmission.