Eurozone: Inflation undershoots ahead of ECB meeting – ABN AMRO

The preliminary estimate for January Eurozone HICP inflation eased to 1.7% y/y, down from 1.9% in December, aligning with expectations. Core inflation also fell to 2.2% y/y. The ECB is expected to keep interest rates unchanged amid concerns about inflation undershooting its target. ABN AMRO analysts predict that inflation will fall below the 2% target in 2026, driven by lower energy prices and a stronger euro.

Inflation trends and ECB outlook

"Today’s release at 1.7% y/y marks the beginning of a period where eurozone headline inflation is set to fall below the 2% target. For roughly the past year, headline inflation remained well behaved around target."

"We expect the ECB to also keep rates on hold for the foreseeable future. The Governing Council appears inclined to look through the undershoot on the assumption that inflation will return to target in 2027."

"While near‑term risks to our view still tilt toward another rate cut due to the undershoot, by 2027 those risks may shift back toward a hike, with upside pressures likely to build from higher domestic demand, among other reasons stemming from German fiscal spending."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)