Inflation falls below target level, European Central Bank holds steady for the fifth consecutive time

On Thursday, February 5th, European Central Bank (ECB) officials held steady for the fifth consecutive time at a monetary policy meeting, in line with market expectations.

The three key interest rates remained unchanged: the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending rate at 2.40%.

In the press release, the ECB stated: “Low unemployment, solid private sector balance sheets, gradual progress in defense and infrastructure public spending, and the supportive effects of previous rate cuts are underpinning economic growth.”

The ECB indicated that the latest assessment confirms that inflation is expected to stabilize at the target level in the medium term.

ECB President Christine Lagarde said at the press conference that the underlying inflation rate is consistent with the 2% target. She noted that inflation prospects are more uncertain than usual. Manufacturing remains resilient despite trade headwinds.

She also mentioned that a strengthening euro could lead to inflation rates falling further below the target.

Eurozone CPI Continues to Decline, Falling Below the Target Level

Eurozone inflation continued to decline in January, reaching its lowest level since September 2024 and falling below the ECB’s medium-term inflation target.

According to preliminary estimates released by Eurostat on Wednesday, the Eurozone Consumer Price Index (CPI) rose 1.7% year-on-year in January, revised from the previous 1.9% to 2.0%; the January CPI decreased by 0.5% month-on-month, the largest single-month decline since November 2023.

Excluding volatile items such as energy and food, core CPI in January increased slightly from 2.3% to 2.2% year-on-year, the lowest since October 2021.

“Falling Inflation Is Not Entirely Beneficial”

For some economists, declining inflation is not entirely positive.

Roman Ziruk, senior market analyst at Ebury, said that the current inflation environment indicates that price pressures are under control, but the risk of inflation falling below the target is increasing.

Ziruk noted that the rapid appreciation of the euro has significantly reduced import prices. He added that this also weakens export competitiveness, which is a vital channel for the eurozone economy.

Over the past month, the euro has appreciated 0.75% against the dollar, and has risen nearly 14% over the past 12 months, partly due to market concerns over the unpredictability of U.S. economic policies.

Some ECB officials have expressed concern about the euro’s strength against the dollar, fearing it could suppress inflation and impact the ECB’s 2% inflation target.

As a result, market expectations that the ECB would raise interest rates a few weeks ago have shifted, and now the probability of rate cuts before the end of the year is about one in five.

Ruben Segura-Cayuela, an economist at U.S. Bank, expects the ECB to remain cautious.

U.S. Bank still forecasts that the ECB will cut rates by 25 basis points in March 2026, marking the final rate cut of this easing cycle, followed by a prolonged period of steady rates in 2026 and 2027.

(Source: Cailian Press)