A surprise drop in Eurozone inflation will concern European Central Bank policymakers but they will likely do no more on Thursday than warn of their readiness to act in future. The policymaking Governing Council meets for its first decision of 2014 after data showed annual Euroland inflation dipped to 0.8% in December from 0.9% in November. The ECB targets inflation of just below 2.0%. <p>

Core inflation, which strips out volatile costs like food and energy, hit a record low of 0.7% last month. The readout will heighten concerns at the ECB about entrenched price weakness taking hold, though strong company activity towards the end of last year will give it some comfort. <p>

The ECB cut its main interest rate to a record low 0.25% in November after inflation slid to a near four-year low of 0.7% in October. No change is expected today, though ECB President Mario Draghi has stressed the central bank still has room to act. <p>

<b>We don’t think the fall back in inflation in December is enough to prompt a new rate cut today, but we do believe it’s sufficient to keep ECB policymakers dovish and ready to act again if need be.
<p><h5>Alan McQuaid</h5>

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