The Euro logo is seen outside the European Bank (ECB) in Frankfurt, Germany.
Frankfurt: Mario Draghi is set to get a bigger taste of inflation, just not in his preferred flavour.
Rising oil prices and a weaker euro mean that projections the European Central Bank (ECB) president released less than a month ago could be revised higher in 2017.
While that’s good news for policy makers who haven’t met their inflation goal in almost four years, it’s also likely to mask continued weakness in the domestic economy.
Faster consumer-price gains could widen divisions in the ECB’s Governing Council as some officials push for a gradual exit from monetary stimulus and others argue that the upturn is still too frail, especially with political events carrying the potential to hit confidence.
After policy makers agreed on December 8 to extend their bond-buying program, albeit at a slower pace, Draghi warned that “uncertainty prevails everywhere” and said purchases will be stepped up if needed. “There is a difficulty in making forecasts with that high a level of uncertainty because the biggest risks are probably still of a political calibre,” said Anatoli Annenkov, a senior economist at Societe Generale SA in London. “In that sense, it is probably wise for the ECB to take a quite measured approach on the inflation outlook.”
Large-scale bond purchases that started in March 2015 are now scheduled to run until at least the end of 2017, with the monthly pace dropping to €60bn ($63n) in April from the current €80bn. That means they will extend through elections in the Netherlands, France and Germany, as well as possible polls in Italy and Greece, all of which could see populist and anti-euro parties gaining ground.
Talks on the UK’s exit from the European Union and the start of Donald Trump’s presidency in the US add to the risks, backing Draghi’s call for caution. Yet at the same time, rising energy costs look set to push up the headline rate of inflation.
Brent crude has surged more than 25 percent since mid-November, in part due to an agreement by the Organization of Petroleum Exporting Countries to curb production for the first time in eight years.
It was up 0.2 percent at $56.98 a barrel at 10:35 am London time yesterday. Those recent gains aren’t taken into account by ECB forecasts that projected consumer-price growth at 1.3 percent in 2017, and accelerating to 1.7 percent in 2019 - not far below the goal of just-under 2 percent.
