Euro zone inflation at 2.5% ahead of ECB rate decision next week

Headline inflation across the euro area was confirmed at a six-month high of 2.5 per cent in January ahead of next week’s European Central Bank (ECB) policy meeting.

The latest Eurostat figures show price growth across the single currency bloc rose from 2.4 per cent to 2.5 per cent last month, slightly disappointing expectations.

This was the fourth consecutive increase in annual inflation since it hit a three-year low of 1.7 per cent in September last year.

However, the move is unlikely to deter ECB policymakers from reducing interest rates as concern over growth overtakes inflation.

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Frankfurt cut interest rates by a further quarter point to 2.75 per cent in January as growth across the bloc stagnated

ECB president Christine Lagarde said the central bank’s five cuts in interest rates since June last year from a peak of 4 per cent were in line with the bank’s hitting its target for inflation of near 2 per cent over the medium term.

However, she warned that “headwinds” meant the economy was “set to remain weak in the near term”.

The latest Eurostat figures show January the highest contribution to the annual euro area inflation rate came from services (+1.77 per cent), followed by food, alcohol and tobacco (+0.45 per cent) and energy (+0.18 per cent).

The relatively high level of services inflation is likely to mean policymakers will continue to opt for smaller quarter point interest rate reductions.

The latest inflation print came as ECB policymaker Pierre Wunsch said the euro zone risked “sleepwalking” into excessive interest rate cuts and must be prepared to stop soon.

The Belgian central bank governor told The Financial Times that he felt “relatively comfortable” with the market expectation of 2 per cent rates by the end of the year “give or take 50 basis points”.

“I’m not pleading for a pause in April but we must not sleepwalk to 2 per cent (interest rates) without thinking about it. If the data justify a new cut, we’ll cut. If they don’t, we might have to pause,” the Financial Times quoted Wunsch as saying.

He also highlighted growing uncertainty over the appropriate level of interest rates, saying he was “not even sure” whether rates remained restrictive for growth and inflation.