Euro-area inflation slowdown undermines calls to end QE

Bloomberg

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 normalisation of monetary policy and they’re definitely not going to hike interest rates fast.”
With largely synchronised gro-wth, 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 Lautenschl-aeger 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 the 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. 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 and energy.

ROLLER-COASTER
“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 December 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.
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 Execu-tive Board member Peter Praet,
the institution’s chief economist. The ECB’s next policy meeting is scheduled for January 25.