Subdued inflation along with poor sentiment indicators strengthen case for further ECB easing

Headline inflation in the Eurozone remained unchanged in August at 0.2 percent y/y, not a big surprise after the low German prints yesterday. Data missed missing analysts' expectations of a rise to 0.3 percent. The more important core inflation which strips out energy and food slipped for the first time in three months to 0.8 percent from 0.9 percent in July.

Today's inflation report follows European Commission survey on Tuesday which showed declines in economic confidence declined across most euro area countries. Data released by the European Commission earlier on Tuesday showed that economic sentiment in the Eurozone edged lower in August, falling to 103.5 from the July figure of 104.5 (revised from 104.6), and below expectations for a reading of 104.1. Business sentiment in the single currency area also missed forecasts, fell sharply to a near three-year low.

Weak economic and business confidence in August is the first signs that concerns over the UK’s Brexit vote may be starting to bite on the continent. ECB will remain uneasy surrounding inflation trends with the headline rate still substantially below the target rate.

"As inflation expectations are still far below the ECB’s 2%-target, we think that the ECB is not done easing monetary policy," said Nordea Bank in a report.