Eurozone inflation dropped to 1.7% in January, below the European Central Bank’s medium-term target of 2%. April 2021 was the last time inflation was recorded lower.
However, this is not necessarily a cause for celebration. This disinflationary trend is in part the result of a lack of demand in the economy, reflected in the slow economic growth recorded in recent years. Nonetheless, falling inflation has also been supported by easing energy pressures — core inflation remains more persistent, but momentum continues to soften rather than re-accelerate.
For the ECB, this outcome strengthens the case for maintaining interest rates at current levels in the near term. With inflation now close to target and economic growth subdued across much of the Eurozone, there is certainly no justification for further monetary tightening. At the same time, while economic growth is only slowly emerging in the bloc, it would require a more drastic fall in activity for the ECB to take the decision to cut interest rates even further, particularly given ongoing wage pressures and lingering services inflation.
For businesses, the implications are significant. Stable inflation at or close to target provides greater visibility over costs, pricing strategies and investment decisions. While borrowing costs remain elevated compared with the pre-pandemic era, they have fallen from earlier peaks — and could potentially ease later in 2026 — offering cautious optimism for capital spending and financing conditions. Consumer demand, however, is likely to recover only gradually as real incomes rebuild.
The Eurozone is in a period of greater price stability rather than rapid growth. Risks remain skewed to the downside from weaker global trade and geopolitical uncertainty, while upside risks stem mainly from wages and services. For now, the ECB has time to pause, and businesses can operate in a clearer, more predictable monetary environment.
*Emeritus Professor Joe Nellis is an economic adviser at MHA, the accountancy and advisory firm
