Inflation cooled off to 1.1% y/y in February, the slowest since December 2016 while core inflation stayed unchanged for the second month in a row at 1.0% y/y. Meanwhile, 4Q2017 wage growth grew 1.7% y/y while the labour cost index eased to 1.5% y/y. Despite February’s inflation growing at a slower pace and core inflation staying unchanged for the second consecutive month, we remain optimistic the ECB will continue with its path to normalize the monetary policy.

We foresee the ECB cementing the expectations of winding down its bond buying by end-2018. In our view, the ECB should end the €30bil bond-buying programme by September and further reduce it to €15bil from October and end it by December 2018. The ECB is expected to start raising rates in 2019.

• Inflation cooled off to 1.1% y/y in February from 1.3% y/y in January, the slowest since December 2016. On a monthly basis, inflation rose 0.2% after falling by 0.9% in January.

• The softer inflation was due to slower prices of processed food, alcohol & tobacco, which went up 2.3% y/y from 2.5% y/y in January while non-energy industrial goods grew 0.6% y/y. Core inflation remained at the same pace for the second month at 1.0% y/y.

• Meanwhile, 4Q2017 wage grew 1.7% y/y from 1.6% y/y in 3Q2017. However, the labour cost index eased to 1.5% y/y in 4Q2017 from 1.6% y/y in 3Q2017.

• Despite February’s inflation growing at a slower pace and core inflation staying unchanged for the second consecutive month, we remain optimistic the ECB will continue with its path to normalize the monetary policy.

• We foresee the ECB cementing the expectations of winding down its bond buying by end-2018. In our view, the ECB should end the €30bil bond-buying programme by September and further reduce it to €15bil from October and end it by December 2018. The ECB is expected to start raising rates in 2019.

Source: AmInvest Research - 19 Mar 2018