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Next week’s European Central Bank (ECB) meeting is one of the most highly anticipated events of 2016; will a global slowdown and a continued disinflationary environment expected force the committee’s hand once more? There is no doubt the expectations for action are at their highest since the infamous December meeting, which saw the euro rally heavily despite a raft of measures from the ECB.
To understand the mindset of the ECB committee, it is important to recognise what changes have occurred to the data available to the ECB between the two meetings.
From an inflation front, the most recent headline CPI figure stands at -0.2%, which is some 0.3% lower than the 0.1% reading in December. However, a great deal of this disinflation will be attributed to the downturn in energy prices, which is why the core reading is also hugely important. Currently core CPI stands at 0.7%, which is also lower than the 0.9% level seen in December. Finally, perhaps the measure which is favoured most by the ECB members is the Eurozone 5y5y inflation swap, which is a measure of what average expectations are likely to look in five years.
Once more, this reading points to a significant deterioration in inflation expectations, with the December reading around 1.7% falling down to the circa 1.4% figure today. With headline CPI, core CPI and the 5y5y inflation expectations all down between 20-30 basis points since December’s meeting, members are likely to be willing to act in a bid to reflate the eurozone.