Inflation Worries Increase ECB Policy Intervention Considerations

Market Trends - 16/11/2015

Separate readings on economic indicators like GDP from constituent countries in the Euro Area contribute to a slowly falling cumulative metric, lending credibility to the willingness of the European Central Bank to expand stimulus should the situation worsen. A collective GDP gain of 0.30% in the Euro Area last quarter according to preliminary statistics is largely due to the inability of moderately successful members like France to outweigh drags on the outlook due to mediocre results from larger contributors such as Germany, especially amidst economic difficulties brought on by the situation in China and other major world powers. French growth last month posted a reasonable 0.30% expansion, but slower growth that missed expectations in Germany and Italy, the largest and third largest components of the Union, respectively, weighed too heavily on aggregate results. With trends swinging this way and growth trending back towards 0.00%, it is hard to ignore the implications of a slowdown in the economic mechanism of Europe.

Prevailing trends in the Euro Area do not bode well for end-of-year monetary policy changes, though expectations were already low given the tone of policymaker speeches recently, nor do they illustrate an easy path for recovery in the form of employment and to a lesser extent, inflation. Prices as they are leave little reason for businesses to raise their own prices, though a recent increase of headline annualized inflation to 0.10% beat expectations of 0.00% with October’s core inflation printing at 1.20% growth. Any positivity gleaned from these signs has not been acknowledged by Europe’s policymakers. ECB President Mario Draghi, for instance, remains concerned about the future for inflation in the face of weak emerging markets and structurally high unemployment according to statements made last Thursday. If his suggestion that monetary policy intervention is required, it is a long time coming. Markets are expecting bankers in the ECB to consider a cut to interest rates of -0.10% or more in the upcoming December meeting along with the option to monetize municipal debt as the supply of eligible sovereign debt shrinks.


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