There wasn’t much expectation that the second reading of February inflation in the Eurozone was going to change all that dramatically. But the 0.2 percent fall continues a pattern of declining inflationary pressure begun in November, which is beginning to look like a cause for some concern and must be giving European Central Bank (ECB) policymakers a headache.
Contributor Jacob Deppe, Head of Trading – Infinox
The latest data only strengthens the belief that we will see significant monetary policy divergence between the US and Eurozone this year. In fact, monetary policy could open a new front in a US/Eurozone trade war. European exports, reliant on a cheap Euro, will benefit from a continuing dovish monetary policy.
Meanwhile, the US Federal Reserve is widely expected to hike interest rates next week and to take a more hawkish approach to monetary policy generally, which will strengthen the Dollar, hurting American exports already subject to new tariffs and widening its trade deficit with Europe. ECB President Mario Draghi made clear last week that victory could not be declared following the European sovereign debt crisis.
As such, he once again maintained a very dovish stance on interest rates. And even when he signalled the end of quantitative easing last week he left the door ajar, in case of a economic downturn. The ECB would almost certainly prefer CPI moved closer to its 2 percent target. But until it does, or until Mr Draghi is succeeded as ECB President by someone of a more hawkish persuasion it seems highly unlikely that monetary policy will shift much at all.