Subdued inflation outlook will ensure ECB treads carefully

The ECB’s decision to reduce its monthly asset purchases from January largely reflected growing optimism that euro-zone inflation will rise towards the target of below, but close to, 2%. Indeed, the latest surveys suggest that underlying price pressures are building and wage growth is rising. But the ECB wants to see these measures of underlying inflation rise further and across the whole eurozone, which is not currently the case. And with core inflation set to rise only gradually over the next couple of years, we think that the ECB will proceed very cautiously with policy normalisation.