Eurozone CPI cooled further to 1.7% in January, the lowest level since September 2024; markets expect the European Central Bank to "hold steady" at this week's meeting.

Eurozone inflation rate fell back in January to its lowest level since September 2024, dropping further below the ECB’s 2% target. On February 4, data released by Eurostat showed that the annual CPI in January was 1.7%, down from 1.9% in December and lower than economists’ forecast of 1.8%. This data was released on the eve of the ECB’s first rate decision meeting in 2026, providing a key basis for maintaining the current rate level. Core CPI simultaneously fell from 2.3% to 2.2%, and services CPI also slowed to 3.2%, indicating that price pressures continue to ease across multiple sectors. Inflation trends are significantly divergent among the EU’s 21 member states: Germany’s inflation rate reached 2.1%, slightly above market expectations, while France’s inflation rate unexpectedly fell to 0.4%, hitting a five-year low. The market generally expects that the ECB will keep its key rate unchanged at 2% for the fifth consecutive policy meeting and reiterate its assessment that monetary policy is “in a good position.” ECB May Stand Pat This Time Although official forecasts show that inflation is expected to return to target after staying below 2% this year and next, policymakers widely believe their current toolkit is adequate, but a few decision makers remain concerned about the risk of prolonged low inflation. The recent strengthening of the euro may further exacerbate such concerns. Meanwhile, persistently high services sector inflation remains a focal point for some officials. ECB President Lagarde recently warned that the slow moderation of wage pressures could delay the overall inflation’s decline. Analysts point out that future escalation of geopolitical risks, significant strengthening of the euro, or an unexpected rebound in inflation, could still prompt a change in policy stance. Overall, eurozone inflation is expected to stay below 2% over the next two years. Lorenzo Codogno, founder and chief economist at Lorenzo Codogno Macro Advisors, noted that although the phrase “in a good position” may still be used, in the context of rising global uncertainty and a fragile economic environment, the ECB is likely to be more cautious in its language. He believes that, under the base case, the ECB will maintain rates unchanged in 2026 and 2027, with a high threshold for any policy shift. Next Move May Be a Rate Hike Despite inflation continuing below the target, most economists believe the ECB has limited room to adjust policy in the short term, and the next move is more likely to be a rate hike rather than a cut. Paul Hollingsworth, head of developed markets economics at BNP Paribas Markets 360, said that as underlying price pressures remain resilient, the ECB is expected to keep rates steady for a lengthy period, with a high bar for any policy action. He predicts the next adjustment may be a rate hike, possibly in the third quarter of 2027, when domestic price pressures driven by increased spending in areas such as defense and infrastructure are likely to become more evident. Lorenzo Codogno also believes that while a moderate rate cut is possible in the short term, upside risks are more prominent in the medium term. He stated that if geopolitical tensions intensify, the euro appreciates markedly, or inflation data continues to exceed forecasts, these could all prompt the ECB to change its current policy stance. Risk Disclaimer Markets are risky; investments should be made cautiously. This article does not constitute personal investment advice and does not consider the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investments made accordingly are at the user’s own risk.