European Central Bank policy makers who marked the turn of the year by pushing for an end to crisis-era stimulus measures just got a reminder that they’ll have to wait a while longer for price pressures to pick up.
Despite solid economic growth, euro-area inflation slowed to 1.4 percent last month from 1.5 percent, and the underlying rate unexpectedly failed to rise from a meagre 0.9 percent. The data highlight the difficulty for the ECB in judging when to pull back, even as some Governing Council members warn of the dangers of postponing the decision too long.
“Does it bode well for the hawks? Not really,” said Piet PH Christiansen, senior ECB and euro-area analyst at Danske Bank A/S in Copenhagen. “We’re going to see very slow normalization of monetary policy and they’re definitely not going to hike interest rates fast.”
With largely synchronized growth, and the ECB now referring to an “expansion” rather than a “recovery,” sentiment may be shifting in the 25-member Governing Council. Longtime hawks such as Germany’s Jens Weidmann and Sabine Lautenschlaeger have found some of their views echoed in recent weeks by influential colleagues including Executive Board member Benoit Coeure, a key architect of quantitative easing.
Yet Friday’s data could serve as a cue not to move too fast. Consumer-price growth is well short of the goal of just under 2 percent, even with the support of QE and negative interest rates, and the ECB forecasts little improvement this year.
A separate report showed Italian inflation unexpectedly slowed last month to 1 percent, the lowest level in a year. The country faces March elections that could stoke uncertainty.
What Our Economists Say
“It will take time for domestic prices to strengthen, and as a result it seems likely the ECB will extend its QE program beyond September”
— Maxime Sbaihi and Jamie Murray, Bloomberg Economics
The euro was little changed after the data, and was down 0.1 percent at $1.2052 at 12:19 p.m. Frankfurt time.
The ECB’s concerns over euro-area prices are reinforced by the weakness of core inflation, which excludes volatile items such as food, energy and tobacco.
“It could be something of a roller-coaster ride for headline inflation because of oil prices, but what remains crucial is core,” said Nick Kounis, head of financial markets research at ABN Amro in Amsterdam. “If we’re going to see flattish core inflation prints — and if we see flattish wage prints — then that would make the ECB cautious.”
The pace of QE was halved this year to 30 billion euros ($36 billion) a month, though President Mario Draghi reiterated after the Dec. 14 policy meeting that buying will run to September and could be extended again. Holdings will climb to at least 2.55 trillion euros, and the deposit rate of minus 0.4 percent won’t be raised until well after purchases stop.
The account of last month’s meeting will be published on Jan. 11, and may give some insight into how divided policy makers are as they head into 2018. Some have already laid out their position.
Coeure, responsible for the ECB’s market operations, said in an interview with Caixin Global last month that there was a “reasonable chance” the latest extension of asset purchases will be the last.
Behind the Curve
His colleague Yves Mersch told Germany’s Boersen-Zeitung that officials must be careful not to act so tentatively that they “fall behind the curve.” While advocating caution in exiting from stimulus, he favors a decision before the summer.
Austria’s central-bank governor, Ewald Nowotny, said in an interview with Sueddeutsche Zeitung that the end of the bond-buying program is “within sight.”
Still, Draghi hasn’t spoken publicly recently, and nor have typically dovish officials such as Vice President Vitor Constancio and Executive Board member Peter Praet, the institution’s chief economist. The ECB’s next policy meeting is scheduled for Jan. 25.
With surveys showing private-sector economic activity in the euro area at its strongest in almost seven years in December, German unemployment at a record record low and Spanish jobless claims down the most since June, there are nascent signs that wage and price price pressures might start to rise.
Germany’s IG Metall union is pushing for a 6 percent pay increase on behalf of 3.9 million metalworkers and engineers. Those talks will resume next week after an initial deadline to reach an agreement passed on Dec. 31.
“The euroboom is everywhere but in the inflation rate,” said Bert Colijn, senior euro-zone economist at ING Groep NV in Amsterdam. “The ECB is unlikely to change course early in the year, even if economic data continues to surprise on the upside.”