Euro area headline inflation to reach close to zero in next few months

The inflation rate in euro area fell to -0.2% y/y and the core rate to 0.7% y/y in February, mainly due to decline in energy prices. With the low wage and lending growth, the risk of deflation cannot be excluded in case the rebound fades and wage growth declines. Headline inflation is likely to close to zero in the next few months before it rebounds to 1% y/y by the end of 2016 and 1.5% y/y by the end of 2017 with the help of a higher oil price.

In spite of considerable policy easing in March, it is unlikely that the ECB is done. The central bank, at the very least, is likely to buy bonds much beyond the currently indicated March 2017. If inflation does not pick up, bond purchases might be expanded and extended to other asset classes.