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 Inflation has undershot the ECB's target for nearly three years and
even radical policy steps including 1.5 trillion euros of asset
purchases will take years at best to push price growth back toward 2
percent, threatening the bank's credibility.
Opponents of policy easing had relied on relatively strong readings
of core inflation, which excludes volatile energy and food prices,
in arguing that weak price growth was mostly an effect of the big
oil price fall.
But even core data has started to soften, indicating that low energy
prices are feeding into the price of goods and services very
quickly.
Headline inflation, targeted by the ECB, held steady at 0.2 percent,
missing expectations for a rise to 0.3 percent and still far short
of the bank's target, Eurostat said.
Meanwhile core inflation, closely watched by policy hawks like
Germany's Bundesbank, eased to 0.8 percent from 0.9 percent in
November and 1 percent in October.
"The numbers we got today are a tentative indication that inflation
may not pick up as the ECB had forecast a month ago," said Kenneth
Broux, head of corporate research, FX and rates at Societe Generale.
"It gives the market the reason to believe, and that’s certainly our
forecast, that the ECB will come back and do more, potentially as
soon as March, in terms of cutting the deposit rate and expanding
the quantitative easing program even more."
ECB President Mario Draghi has warned that low core inflation is a
worry because it is a good predictor of where inflation is likely to
stabilize in the medium-term.
The 19-country euro zone's central bank cut its deposit rate deeper
into negative territory in December and extended its asset purchase
scheme by six months, hoping to boost price growth and bolster
long-term inflation expectations.
"The ECB will probably soon have to give up hope of a stronger
underlying price momentum this year. Further monetary easing will
therefore stay on the agenda," Commerzbank said.
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But easing may not be imminent, as growth, lending and jobs data has
been surprisingly strong. One of the ECB's doves, Vice President
Vitor Constancio, meanwhile argued recently for steady policy for
the "foreseeable future".
Growth in lending to households, a future indicator of economic
growth, rose to its highest level since late 2011 in November, while
corporate lending growth was at its highest since early 2012.
The euro zone purchasing managers' index for manufacturing rose to a
20-month high of 53.2 in December, data on Tuesday showed, while
unemployment in Germany, the bloc's biggest economy, held steady at
its lowest since reunification in 1990.
"The ECB will not like these inflation numbers ... Nothing points to
a significant pick-up in core inflation," Nordea said. "While the
January meeting will most likely be for wait-and-see, March could be
more interesting."
(Additional reporting by Francesco Canepa; Editing by Philip
Blenkinsop and Catherine Evans)
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