Mario Draghi, president of the European Central Bank (Photographer: Krisztian Bocsi/Bloomberg)

Inflation Signals Give Draghi Little Respite on Path to QE Exit

(Bloomberg) -- Another month of inflation data, and Mario Draghi still doesn’t have a definitive sign that the European Central Bank can consider ending its monetary stimulus.

Consumer-price growth weakened in June even as the core rate picked up, backing the ECB president’s call for persistence with loose policy and prudence in signaling its withdrawal. At the same time, the figures provide some fodder to colleagues such as Executive Board member Sabine Lautenschlaeger, who urged a faster pace in preparing for normalization.

More than four years into its economic recovery, fortified by negative interest rates and a 2.3 trillion-euro ($2.6 trillion) bond-buying program, the euro area has finally turned the corner and is starting to reflate. That has sparked a public debate over how fast the ECB should start paring back its stimulus, even with price and wage growth still muted.

“Even if no stable trend is visible as yet -- and you can see that in the data published today -- it is important to prepare for different times, for there is reason to be optimistic,” Lautenschlaeger said at an event in Berlin on Friday. “Monetary policy should already be making preparations for a return to a normal stance. And it should adapt its communication accordingly.”

Euro-area inflation slowed to 1.3 percent from 1.4 percent the previous month. That’s still well short of the goal of just under 2 percent, a target the ECB doesn’t project it’ll reach on a sustainable basis until at least late 2019. The core rate, excluding energy and food, was just 1.1 percent but still up from 0.9 percent in May.

And the trend is higher, as Draghi acknowledged on Tuesday at the ECB Forum in Sintra, Portugal, when he said ECB stimulus had overcome the threat of a downward spiral in wages and prices.

“We can be confident that our policy is working and that those risks have abated. The threat of deflation is gone and reflationary forces are at play.”

In a taste of just how delicate communicating the withdrawal of monetary support will be, those words and a suggestion that stimulus can be reduced without tightening financial conditions sparked a rally in the euro and bond yields. Markets then went into a whiplash when Bloomberg reported that the ECB considered investors to have misjudged Draghi’s comments.

The euro traded at $1.1409 at 2:53 p.m. Frankfurt time, near the highest level in more than a year though down 0.3 percent on the day.

Economists warned against reading too much into the fact that the inflation numbers beat estimates. The pickup in underlying price growth was primarily driven by higher services charges in Germany, according to Tuuli Koivu, senior analyst at Nordea in Helsinki. As those have proved volatile in recent months, it’s too soon to gauge whether the increase is the beginning of more pronounced trend, she said.

The complexity of the currency bloc’s inflationary outlook was highlighted by data this week from the region’s biggest economies, showing an unexpected pickup in Germany, a slower-than-anticipated cooling in Spain, and weakness in France and Italy


ActualSurveyPrior
Euro-Area Headline 
Euro-Area Core
1.3%
1.1%
1.2%
1.0%
1.4%
0.9%
Germany1.5%1.3%1.4%
France0.8%0.8%0.9%
Italy1.2%1.4%1.6%
Spain1.6%1.5%2.0%

At the same time, economic growth is powering ahead. The 19-nation region recorded its fastest expansion in six years in the second quarter, according to IHS Markit’s gauge of activity in the manufacturing and services sectors. While momentum slowed this month, growth likely accelerated to 0.7 percent in the April-June period.

Draghi’s concern is that the trend hasn’t yet fed into significant wage and price growth. Lautenschlaeger admitted that the inflation goal hasn’t yet been achieved, but said it will be eventually. Her German colleague on the Governing Council, Bundesbank President Jens Weidmann, made a similar point on Wednesday in Stuttgart when he said “there can be different opinions about the right degree of monetary-policy accommodation.”

Bond purchases are currently scheduled to run until the end of this year, yet a tapering strategy for 2018 wasn’t even on the agenda when policy makers met on June 8. The official account of that session will be published next week, perhaps giving some insight into how much dissent there was.

“Today’s release confirms that inflationary pressures remain subdued,” said Julien Lafargue, European equities strategist at JP Morgan Private Bank in London. “The ECB is still not in a hurry.”

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