Key highlights of the previous week

Source: Dukascopy Bank SA
The Euro zone slipped into deflation, as consumer prices fell more than expected due to plummeting oil prices, according to the flash estimate by Eurostat. The data showed consumer prices fell on an annual basis in December for the first time since the financial crisis more than five years ago, building pressure on the European Central Bank to employ stimulus programme as early as this month. Preliminary CPI dropped 0.2% in December, compared with the 0.3% rise recorded in the preceding month. December was the 22nd straight month, in which the inflation rate remained below the ECB's goal of just under 2.0%. The data indicates prices are not responding to the recent stimulus measures by the ECB, which increases pressure on central bankers to step up more aggressive stimulus.
Meanwhile, the Bank of England kept monetary policy unchanged after its first meeting in 2015, amid cooling inflation, which fell to the lowest level in 12 years, and softer growth at the end of 2014 and going into 2015. Business activity in the UK services sector, the biggest segment of the nation's economy, slowed markedly at the end of 2014, growing at the slowest clip in 19 months. Thus, the fourth quarter GDP data might show the economy's growth rate eased at the end of 2014, but the year is still set to be the strongest period of growth since the financial crisis. Inflation remains significantly subdued and is seen to remain below the 2% official goal until late 2017. Falling energy costs and food prices should keep price pressures contained, thus leaving households with more cash.
Minutes of the latest FOMC meeting were scarce on new information, showing once again that the Fed opted out to remain patient in beginning to normalize the monetary policy. Thus, the Fed is unlikely to raise interest rates until April. The Fed reiterated that policy decisions depend on the economy's progress toward full employment and 2% inflation, the central bank's dual mandate. Although cheaper energy costs and stronger Greenback are seen to keep inflation below the Fed's inflation goal, minutes revealed normalization might start even when core inflation is still short of target. Nevertheless, the Fed board members would have to be "reasonably confident" that inflation would return to 2%. Minutes also showed that the Fed saw cheaper energy costs as a positive driver for the US economy and the labour market. New quarterly forecasts showed that while most Fed policy makers expected a hike of the federal funds rate in 2015, they also lowered their expectations for the pace of lifts that would follow. The median forecast called for the rate to climb to 1.125% by the end of the year, down from the 1.375% predicted in September.


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