Eurozone inflation ticked up in January, only modest relief for the European Central Bank which is still likely to cut rates again as price growth could turn negative by the spring and lending suffered an unexpected setback. Inflation has hovered near zero for more than a year, well short of the central bank's near 2 percent target, and ECB President Mario Draghi has already said another package of policy easing could be unveiled as soon as March.
Headline inflation, the main indicator watched by the ECB, rose to 0.4 percent from 0.2 percent while core inflation, which strips out volatile food and energy prices, rose to 1 percent from 0.9 percent, reversing the previous month's fall. "Don't be fooled by today's rise in euro area inflation, it was affected by base effects that will likely be more than reversed in February," Nordea economist Jan von Gerich said.
"The recent bounce in oil prices is of limited consolation for the ECB, as inflation expectations have not seen a similar rise," he added. "More monetary stimulus will be in store in March." Indeed, Jens Weidmann, the Bundesbank's influential president warned on Thursday that inflation forecasts for this year must be significantly reduced and numbers could turn negative in the months ahead.
Although crude oil prices rebounded this week, they are still 22 percent lower than in early December, when the ECB cut its deposit rate and expanded its asset buying programme to 1.5 trillion euros on worries about low consumer price growth. Adding to its concerns, lending growth to the private sector suffered an unexpected slowdown in December as corporate lending growth slowed to a near halt, while M3, a broader indicator of money circulating in the currency union, also fell. Corporate lending growth eased to 0.3 percent and even the November growth figure was revised to 0.7 percent from an initial 0.9 percent.
The ECB has been buying 60 billion euros worth of assets a month, partly to lower interest rates and stimulate lending. Although the asset buys and ultra low rates helped reverse the decline in lending, they have so far failed to push figures too far into positive territory. The ECB will next meet on March 10 and analysts expect it to cut its deposit rate to -0.4 from -0.3 percent. Although further measures are likely to be discussed, analysts are split whether the bank will raise the monthly volume of asset purchases.