The further rise in euro-zone CPI inflation at the start of 2011 will have done little to ease the ECB’s fears that price pressures in the region are building. Nonetheless, inflation remains far lower than in mid-2008, the last time the ECB raised interest rates and there are few signs of “second-round effects” emerging. Indeed, given the large amount of spare capacity still in the economy, we expect core inflation to remain well below the ECB’s 2% “ceiling” throughout 2011. Nonetheless, with the headline rate of inflation likely to remain above 2% for the bulk of this year, the ECB is likely to maintain its current hawkish stance for some time yet.
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