Eurozone January CPI further cooled to 1.7%, the lowest level since September 2024, with markets expecting the ECB to "hold steady" at this week's meeting.

Eurozone January inflation rate falls to the lowest level since September 2024, further below the European Central Bank’s 2% target.

On February 4th, data released by Eurostat showed that the annual CPI for January was 1.7%, lower than December’s 1.9% and economists’ expected 1.8%. This data was released on the eve of the ECB’s first interest rate decision meeting in 2026, providing a key basis for maintaining the current interest rate level.

Core CPI also decreased from 2.3% to 2.2%, and services CPI slowed to 3.2%, indicating that price pressures are easing across multiple sectors. Inflation trends among the 21 EU member states show significant divergence: Germany’s inflation rate reached 2.1%, slightly above market expectations; France’s inflation unexpectedly dropped to 0.4%, hitting a five-year low.

Market expectations generally suggest that the ECB will maintain the key interest rate of 2% for the fifth consecutive time at this policy meeting, reaffirming its assessment that monetary policy is “in a good place.”

ECB Likely to Hold Steady This Time

Despite official forecasts indicating that inflation will remain below the 2% target this year and next, with prospects of returning to the target, policymakers generally believe current tools are sufficient. However, a few decision-makers express concerns about the risk of prolonged low inflation. Recent euro strength may further exacerbate these concerns.

Meanwhile, persistent high inflation in the services sector remains a focus for some officials. ECB President Lagarde recently warned that the slow pace of wage pressure easing could delay the overall decline in inflation.

Analysts note that if geopolitical risks escalate, the euro strengthens significantly, or inflation unexpectedly rebounds, policy stance adjustments could still occur. Overall, inflation in the euro area is expected to stay below 2% over the next two years.

Lorenzo Codogno, founder and chief economist of Macro Advisors, pointed out that, although the phrase “in a good place” may still be used, in the context of increasing global uncertainties and a fragile economic environment, the ECB may adopt a more cautious approach in its wording. He believes the baseline scenario remains that the ECB will keep rates unchanged in 2026 and 2027, with high thresholds for any policy adjustments.

Next Move Could Be a Rate Hike

Despite inflation remaining below target, most economists believe the European Central Bank 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, pointed out that due to resilient potential price pressures, the ECB is expected to keep rates stable for an extended period, with any policy action facing high hurdles. He predicts the next policy adjustment could be a rate hike, possibly in Q3 2027, when increased spending in defense and infrastructure sectors will likely put more domestic price pressure.

Lorenzo Codogno also believes that there is a mild possibility of a short-term rate cut, but medium-term risks are more skewed to the upside. He stated that if geopolitical tensions escalate, the euro appreciates significantly, or inflation data continues to surprise on the upside, the ECB could shift its current policy stance.

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