Bloomberg.- A third month of slowing inflation in the euro-area has given European Central Bank President Mario Draghi ammunition to ward supporters of a faster stimulus exit a little while longer.
The rate of price growth slowed to 1.2 percent this month from 1.3 percent, dropping to its weakest since 2016. The core measure was unchanged at 1 percent. The figures follow a series of releases that have checked the economy’s thundering momentum at the start of 2018, which had emboldened policy makers who want a faster unwinding of the central bank’s crisis-era monetary stimulus.
Draghi emphasized to European lawmakers this week that an expansionary policy is still warranted even as the economic situation is “improving constantly.” At the same time, he’s more confident that declining unemployment will boost pay and inflation eventually, even if the rate remains below the ECB’s target of just under 2 percent for now.
The ECB’s Governing Council meets next week with new quarterly forecasts and is likely to discuss a change in its policy language to pave the way for an end of quantitative easing. Executive Board member Benoit Coeure — an architect of the program who has more recently taken a hawkish turn — said last week that the ECB can afford to slow bond purchases, as long as it gives clear guidance on the path of interest rates.
Bundesbank President Jens Weidmann, who has long argued in favor of unwinding stimulus, chimed in on Tuesday, saying in a Bloomberg TV interview that the ECB’s guidance on interest rates is “rather vague” and could be strengthened as the end of bond buying approaches.
“Surveys do suggest that the current economic acceleration has started to give businesses more pricing power,” said Bert Colijn, senior euro-area economist at ING Bank NV in Amsterdam. But “expectations of a quick return of inflation seem exaggerated for the euro zone, making a cautious ECB next week very likely.”
The euro fell after a report earlier on Wednesday that showed French inflation unexpectedly slowed to 1.3 percent this month. The single currency has since recovered some of its losses. It traded at $1.2217 at 12:17 p.m. Frankfurt time.
The euro zone inflation result masked results that were weaker than economists anticipated in the region’s three largest economies. Aside from France, consumer price growth almost halved in Italy and slowed in Germany.
The European Commission said on Tuesday euro-area economic sentiment slipped for a second month in February after touching a 17-year high in December. Data last week showed business confidence in Germany and manufacturing and services activity in the euro area all weakened more than economists forecast.
Such bumps along the road of Europe’s recovery from the ravages of its debt crisis underscore why Draghi is not yet ready to pare back support for the euro area. Economic slack may be bigger than thought, and policy makers must remain persistent in providing monetary accommodation, he said.
“Maybe the growth rate will be a little bit lower than we have seen before but it’s still running in a very stable environment,” said Jens Kramer, an economist at NordLB in Hanover. “Wage growth in an environment of very healthy employment should be a sign that we don’t have to fear a cooling down.”
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