November CPI affirms ECB action today

November inflation (advance) reinforced expectations that the European Central Bank (ECB) will embark on further monetary stimulus today. Headline inflation rose 0.1% YoY, steady from month before but below expectations. This takes Jan-Nov average to 0% down from last year's 0.4%. 

Price pressures eased broadly except in energy, with the erstwhile firm food and services indices slowing to 1.5% (vs Oct's 1.6%) and 1.1% (vs Nov's 1.3%) respectively. The energy price index recovered modestly to -7.3% in Nov from -8.5% month before, but is likely to slip into disinflationary mode back in Dec as global prices extend decline. Core inflation also eased from the modest pickup in Oct to 0.9% YoY from 1.1% month before.

Downside surprise in inflation coupled with marginally softer 3Q GDP growth released earlier raise odds of ECB action when the Governing Council meets today. Weak energy prices, subdued demand and economic slack have kept readings way below the ECB's target of 2%. Revised staff projections due today will see inflation stay below target beyond 2017, providing further ammunition to ease policy. In addition, the ECB's monetary conditions index also pointed to real euro gains (post Mar15 QE announcement) tightening monetary conditions. 

The mix of policy action today could include a 10-15bps cut in the deposit facility rate to -0.30-0.35%, increase in the scale of the asset purchases and/or extension of the duration of the program beyond Sep 2016. Monthly increase of an estimated EUR 15bn in QE purchases and an extension to Mar 2017, for instance, will expand the ECB's balance sheet by another EUR 600bn, in addition to EUR 1.1trn in the existing program. In all, odds of further ECB action are high, even at the risk of a temporary and shallower impact on economic conditions.