ECB likely to look through rising inflation, to continue further easing in Q4

According to data released by the Eurostat on Thursday, prices in the euro-area rose in June, but were still well below the European Central Bank’s (ECB) target of close to but just below 2.0 percent.

The flash estimate for Eurozone consumer price inflation showed a 0.1 percent rise in overall inflation, which was higher than the 0.0 percent analysts had forecast and the -0.1 percent previously. Core CPI, which excludes Food, Energy, Tobacco and Alcohol also rose above expectations, reaching 0.9 percent versus the 0.8 percent expected.

The sharp increase in inflation reflects a fading drag from energy prices after the oil price has risen to the highest level since the end of 2015. ECB will likely look through the rise in inflation noting the impact of energy prices, rather than a fundamental, and sustainable pick up in core prices.

According to Nordea Bank’s Holder Sandte, the rise in inflation was ‘not unsurprising’, but regardless would not prevent the ECB from easing in Q4: “We think that the rise in headline inflation will not prevent the ECB from easing monetary further in Q4, assuming that inflation expectations will remain too from the ECB's perspective,” said Holder Sandte.