Amid active deliberation by European Central Bank officials on the next steps for interest rate policy, inflation in the Eurozone has fallen further below the ECB's long-term target of 2%. The Eurozone's Consumer Price Index (CPI) for January rose by a mere 1.7% year-on-year, a further slowdown from the previous month's 1.9% and broadly in line with the median estimate from economists. This reading also marks the lowest level since September 2024. The data was released just ahead of the ECB's first interest rate-setting meeting of 2026, with economists widely anticipating that borrowing costs will be held steady at 2% for a fifth consecutive time on Thursday.
The core inflation rate, which excludes the more volatile components of food and energy, unexpectedly declined to 2.2%—the lowest figure recorded since October 2021. Eurostat reported on Wednesday that the closely watched services sector inflation indicator also slowed to 3.2%.
As illustrated in the chart above, the Eurozone's headline CPI inflation has continued to moderate, now sitting entirely below the ECB's target range. These figures emerge as the ECB convenes for its first monetary policy meeting of 2026, with near-unanimous consensus among economists forecasting that Thursday's decision will maintain borrowing costs at 2% for a fifth consecutive time.
Following market bets that CPI inflation will remain below the ECB's target throughout this year and next, policymakers generally perceive themselves to be in an advantageous position as inflation has essentially returned to the target level. However, a minority remain concerned that inflation could persist below the target for an extended period, potentially locking the Eurozone economy into a trajectory of weakness. The recent robust appreciation of the euro could potentially intensify these concerns.
"The January inflation figures may spur increased discussion within the ECB regarding further monetary easing. The deceleration in services inflation is likely viewed as crucial for aligning underlying price pressures sustainably with the 2% target, yet some Governing Council members may fear this process goes too far. Coupled with the impact of a strong euro, these topics are expected to feature prominently in the discussions among policymakers at this week's meeting," commented David Powell, Senior Eurozone Economist at Bloomberg Economics.
Concurrently, some ECB officials remain apprehensive about the stubbornly elevated pace of price increases in the services sector. ECB President Christine Lagarde has previously cautioned that any cooling in this area could be further delayed by a slower-than-expected retreat in wage pressures.
The actual inflation situation varies significantly across the 21 member states of the Eurozone. Germany's inflation rate stands at approximately 2.1%, slightly exceeding economists' forecasts, while France's inflation rate unexpectedly registered a five-year low of 0.4%.
One potential factor that could exert upward pressure on prices is a faster pace of economic expansion. Although the euro area's economy grew by 0.3% in the fourth quarter of 2025—marginally faster than anticipated—recent threats of further tariffs on Greenland by US President Donald Trump underscore the persistent risks to Eurozone growth.
Given this lingering uncertainty, ECB policymakers collectively advocated for maintaining maximum flexibility regarding interest rates during December's monetary policy meeting.
Within the latest Eurozone inflation data, the most striking figure is undoubtedly France's inflation rate of just 0.4%, a five-year low. The core logic behind this lies in a more pronounced decline in manufactured goods prices: INSEE explicitly stated that the disinflation was primarily driven by a sharper drop in industrial goods prices, notably clothing and footwear, which weakened substantially due to seasonal sales promotions and some exports being redirected to the domestic market; furthermore, the statistical period included more discount days (18 days versus 13 in January 2025), amplifying the seasonal price reduction effect. Additionally, a significant slowdown was observed in services, particularly healthcare: the current pace of service price increases in France has moderated, with INSEE highlighting that the rise in doctors' fees was more limited compared to last year, thereby dragging down services inflation.
How do economists view the ECB's monetary policy path for 2026? The mainstream expectation can be summarized in one sentence: under the baseline scenario, rates are highly likely to remain at 2% throughout the entire year of 2026. Interest rate cuts represent a low-probability tail-risk scenario, contingent on inflation persistently undershooting the target accompanied by a more pronounced cooling in services and wages. The latest surveys indicate that nearly 75% of economists specializing in the Eurozone anticipate that interest rates will remain unchanged until the end of 2026.
Comments