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Eurozone’s consumer price inflation for this year is seen at 1.4 percent, well-keeping expectations above the European Central Bank’s (ECB) 2 percent target, although the central bank has not done too much in reaching the "below, but close to, 2 percent" over the past few years.
In an attempt to stoke inflation, the Governing Council slashed its main policy rates to unprecedentedly low levels and it implemented a QE program, which is still in place. The overall inflation rate has moved higher this year, due largely to a rebound in energy prices, although the core rate of inflation, which is a good measure of underlying inflation pressures, remains well short of 2 percent.
The annual core inflation rate (excluding energy, food, alcohol, and tobacco) was less than 1 percent in November, pointing to the persistence of economic slack. The euro’s appreciation is making things worse on that front. The central bank’s forecast of 1.2 percent for the 2018 inflation rate assumed EURUSD stabilizing at 1.18. So, if the euro appreciates further from here, another downward revision of the ECB’s inflation forecasts may be necessary.
Meanwhile, geopolitics poses a cause of great concern for the ECB policymakers in terms of inflationary pressures as well. These disturbances are deemed to disturb the economic growth of the region inflation target. Anti-EU populists could gain power in Italy following the 2018 elections by capitalizing on a soft economy and a youth unemployment rate of more than 35 percent.
Meanwhile, Brexit is another problem for the Eurozone considering the significant trade linkages with the UK. Given all circumstances, the ECB would prefer a loose monetary policy stance for quite some time.
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