The Eurozone's January CPI further cooled to 1.7%, the lowest level since September 2024, with market expectations that the European Central Bank will "stay put" at this week's meeting

The inflation rate in the Eurozone fell to its lowest level since September 2024 in January, further below the European Central Bank's target of 2%.

On February 4th, data released by Eurostat showed that the year-on-year CPI for January was 1.7%, down from 1.9% in December and below economists' expectations of 1.8%. This data was released on the eve of the European Central Bank's first interest rate decision meeting in 2026, providing a key basis for maintaining the current interest rate level.

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

The market widely expects that the European Central Bank will maintain the key interest rate at 2% for the fifth consecutive time at this policy meeting and reaffirm its assessment that monetary policy is "in a good position."

The European Central Bank May Hold Steady This Time

Although official forecasts indicate that inflation is expected to return to target levels after remaining below the 2% target this year and next, policymakers generally believe that the current tools are sufficient. However, a few decision-makers have expressed concerns about the risk of prolonged low inflation. The recent strengthening of the euro may further exacerbate these worries.

Meanwhile, persistent high inflation in the services sector remains a focus for some officials. European Central Bank President Christine Lagarde recently warned that the slow decline in wage pressures could delay the overall decrease in inflation.

Analysts point out that if geopolitical risks escalate, the euro strengthens significantly, or inflation unexpectedly rebounds, it could prompt a shift in policy stance. Overall, Eurozone inflation is expected to remain below 2% over the next two years.

Lorenzo Codogno, founder and chief economist of Macro Advisors, noted that while the phrase "in a good position" may still be used, the European Central Bank's use of related wording may become more cautious in the context of increasing global uncertainty and a weakening economic environment. He believes that the baseline scenario remains that the European Central Bank will keep interest rates unchanged in 2026 and 2027, with a high threshold for initiating any policy adjustments.

The Next Move May Be an Interest Rate Hike

Despite inflation remaining below the target level, most economists believe that the European Central Bank has limited room for policy adjustments in the short term, and the next action is more likely to lean towards an interest rate hike rather than a cut.

Paul Hollingsworth, head of developed markets economics at BNP Paribas Markets 360, pointed out that due to persistent underlying price pressures, the European Central Bank is expected to maintain stable interest rates for an extended period, with any policy action facing a high threshold. He anticipates that the next policy adjustment may be an interest rate hike, potentially in the third quarter of 2027, when domestic price pressures from increased spending in defense and infrastructure sectors will become more apparent. Lorenzo Codogno also believes that there is a moderate possibility of a short-term decline in policy rates, but the upward risks are more prominent in the medium term. He stated that if geopolitical tensions escalate, the euro appreciates significantly, or inflation data continues to exceed expectations, it may prompt the European Central Bank to change its current policy stance