Danske Research Team notes that Euro area data show inflation slightly below target but higher than expected, reinforcing expectations that the ECB will keep its policy rate unchanged at 2.00%. Headline and core inflation have surprised to the upside, while futures pricing suggests only a temporary rise in Oil and European gas prices.

Euro inflation surprise and policy outlook

"In the euro area, HICP inflation rose to 1.9% y/y in February, above expectations, up from 1.7% y/y. Core inflation also exceeded forecasts at 2.4% y/y (cons: 2.2%), with core services inflation rebounding 0.4% m/m s.a., confirming January's 0.1% m/m s.a. dip was temporary. "

"While the Winter Olympics in Italy contributed to the inflation surprise, momentum in core inflation remains aligned with the ECB's targets. Headline inflation undershooting the 2% target by less than expected supports the unchanged policy rate."

"We now expect euro area inflation to reach 2.0% y/y in March and 2.2% in Q2 due to rising European gas prices."

"However, the ECB is likely to look past this temporary headline inflation rise, given underlying disinflation and futures pricing indicating a short-term spike in oil and gas prices."

"In the euro area, we will receive the January unemployment data and the final February PMIs. We expect the unemployment rate to remain at 6.2% due to continued employment increases in Southern Europe. The final PMIs are likely to confirm the flash release which surprised positively in a sign of moderate growth."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)