According to today’s flash estimate for February, inflation in the eurozone has risen to 2.0%. In January none of the eurozone member states still had inflation below zero. Energy and food are the key drivers. Core inflation (stripping out energy and unprocessed foodstuffs) was unchanged at 0.9% year-on-year. In our view the headline rate has now peaked, with the year-on-year figure likely to come in somewhat lower from May onwards. However, with our forecast of 1.7% eurozone inflation both this year and next, we think that the ECB’s objective has been practically reached – in any event there is no longer any reason to stick with the present monetary policy course that was geared to tackling deflation.
At next Thursday’s ECB press conference the current 1.3% projection for eurozone inflation this year will be jacked up appreciably. At the same time, the ECB should build into its communication the flexibility to rein in its bond purchases more quickly than currently planned if need be. Regardless of uncertainties related to the European election calendar, the discussion about “tapering” or “recalibration” should not be delayed any longer (not least given the lead time for implementation). In addition, an early hike of the deposit rate into less negative territory would send an important signal to the banks. In our opinion, such a move would not conflict with statements by ECB representatives to end QE before there was any question of rate hikes. In a first step the main policy rate could remain at zero and even a “technical hike” to lift the deposit rate up to zero would not constitute the start of a rate-hiking cycle.