Eurozone inflation drops well below target ahead of ECB rate decision

It’s a day before the ECB rate decision and eurozone inflation just dropped to 1.7% from 2%. That sounds more exciting than it is, as base effects in energy have done a lot of the heavy lifting here. Prices at the pump have actually been rising in recent weeks, despite the weaker US dollar.

At the same time, the continued decline in services inflation to 3.2% from 3.4% in January does indicate that broader softness in the inflation environment continues. Core inflation now stands at 2.2%, which is the lowest reading since October 2021.

The softer inflation environment is in line with our expectations for inflation to average below 2% for 2026. Nonetheless, speculation about a further ECB rate cut has intensified in recent weeks amid slowing imported inflation, partly driven by a weaker US dollar. Indeed, import prices remain subdued at present.

Then again, medium-term expectations for inflation have held steady around 2% as more public investment is expected to boost the economy over the course of the year. And indeed, optimism among businesses is on the rise. So, while inflation has dropped below 2%, medium-term inflation expectations are not softening right now.