A sharp rebound in eurozone inflation and a better-than-expected business outlook are certain to fire up demands from some hardliners for the European Central Bank to choke off its ultra-generous monetary policy.
But don’t bet on the bank doing it just yet.
The ECB is still looking at a highly uncertain economic and political landscape this year and is far from declaring victory in its throw-money-at-it campaign to boost inflation to what it sees as normal and to create sustained economic growth.
Consumer prices, a key gauge of economic health, rose by 1.1 per cent in the 19-country eurozone last month, nearly twice as fast as in November and the highest pace in more than three years.
Composite purchasing manager indexes for France, Germany and the eurozone as a whole also came in higher that anyone polled by Reuters had forecast. That implies better-than-expected business expansion.
It also means the ECB could hail the latest reading as evidence that its ultra-loose monetary policy is finally driving inflation towards its target of almost two per cent.
But there are caveats a-plenty.
First, the inflation increase was partly the result of a stabilisation in oil prices, the effect of which are set to start falling out of the data by March.
This is a far cry from the “sustained” increase in inflation that ECB president Mario Draghi wants to see before stopping the bond-buying programme.
“The inflation effect of oil prices will be a brief intermezzo,” Thomas Gitzel, chief economist at private bank VP Bank. “The ECB must therefore continue to exercise humility (and) the money tap remains open for the time being.”
Once energy and volatile food prices are stripped out, inflation did accelerate in December, but only to 0.9 per cent. Economists at Barclays expect it to average just one per cent this year.
This is key because ECB director Benoit Coeure said last week the central bank needed to see this ‘core’ measure, which is a good indicator of economic activity, “clearly exceed one per cent”.
With the picture improving and the latest rebound in oil prices not yet factored into the ECB’s December projections, the central bank may have to revise up its forecasts, but few expect this to translate into immediate policy action.
“The ECB will take note of this, but will wait for further confirmation before it reacts with its monetary policy,” Joerg Zeuner, chief economist at German development bank KfW, said. The optimism found on financial markets about a huge US stimulus once Donald Trump’s administration gets under way is also taken with a pinch of salt by Frankfurt.
ECB vice president Vitor Constancio, for example, has warned about the damage to Europe and the global economy if the new US President-elect followed through on his protectionist pledges.
Ford Motor Co’s scrapping of a planned Mexican car factory to add 700 jobs in Michigan following Trump’s criticism will have done little to ease such concerns.
Finally, the ECB is wary of making any change to its bond-buying machine –which has acted as a safety net for the eurozone economy by taming market pressure and lowering borrowing costs for governments – in a year dense with political risk.
Voters in France, Germany, the Netherlands and possibly Italy will go to the polls amid rising support for anti-euro parties.
Having just extended the asset-purchase programme until December, the ECB’s aim is to hold off any more moves until after the September vote in Germany, where its policy is viewed by many Germans as depressing returns for savers and inflating property prices.
“Unless the economic situation were to change dramatically, the ECB should have no reason to deviate from this path,” economists at Berenberg wrote in a note.
None of which, of course, is likely to mute calls from Germany for an early end to the ECB’s €2.3 trillion money-printing programme. German data showing domestic inflation within a whisker of the ECB’s target set off grumbles from conservative politicians and leading economists.