European Central Bank will enjoy a raising inflation, but not enough to reach the target. The rising oil prices and a weak EUR means that forecasts of the bank before less than a month may be revised upwards in 2017. It is good news for the ECB, which can not meet its objective of inflation now nearly four years, but the finance regulator is also concealed for the continuing weakness in the Eurozone economy.
Faster growing consumer prices could deepen divisions in the Governing Council of ECB. Some economists want the phasing plan for quantitative easing, while others indicate that the recovery is too fragile especially after some political events that have the potential to reduce confidence.
After the ECB in early December decided to extend the program for incentives, albeit at a slower pace, the President of ECB Mario Draghi warned that uncertainty still exists everywhere and that the purchase of assets may be accelerated again if needed. It is difficult to make predictions because of high levels of uncertainty and the biggest uncertainties in the political sphere. In this sense, it would probably be unwise for the ECB to take a measured approach to inflation outlook.
The purchases of assets began in March 2015 and will continue until the end of 2017, but in April the monthly volume will shrink from 80 to 60 billion EUR. This means that the program will act when elections are held in the Netherlands, France and Germany, and probably in Italy and Greece. In each of these countries populist and anti-European parties can receive more support. The negotiations on Brexit and early management of Donald Trump pose additional risks and supports Draghi’s call for caution.
Meanwhile the rising energy costs likely to accelerate inflation. From mid-November, the European Brent oil rose by 25% largely because of the agreement of OPEC to lower yields. This growth is not taken into account in the projections of the ECB’s target for inflation of 1.3% in 2017 and 1.7% in 2019. The data on January 4 will probably show that inflation jumped by 1.0% in December from 0.6% in November.
Each signal that the ECB is approaching the target level of inflation may lead some members of the Governing Council to request an end to quantitative easing plan. The governor of the German Central Bank Bundesbank Jens Weidmann said that monetary policy tightening until in 2019 it will be too late.
“We must act, looking forward. This means to pull the reins once inflation is directed in a sustainable way to our goal”, said Jens Weidmann.
The key point is probably the definition of sustainable. The ECB is dissatisfied with the lack of conclusive upward trend in core inflation, which excludes volatile items like food and energy. This indicator did not increase since June and according to many economists will remain unchanged at 0.8% in December. The unemployment is just under 10% and wage growth is week, which imposes no particular pressure for acceleration of core inflation.
Another risk in the Eurozone, which is a net importer of energy, is that more expensive oil actually weighs on economic growth.
The unclear implications and need to see how the economy is presented in a potentially turbulent year will probably hold dear and his fellow guard in 2017. The next meeting of the ECB on January 19.
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