Tapering Inflation Eases Pressure on ECB to Act

Market Trends - 19/04/2017

After dismissing market speculation of an earlier end to asset purchases, the European Central Bank is likely to reaffirm its decision to maintain stimulus following the latest Euro Area inflation figures.  According to data released earlier in the session, headline consumer price growth slipped to 1.50% during the month of March after reaching 2.00% in February, which marked the fastest pace of expansion since 2013.

The core figure for the Euro Area, which strips away the more volatile food and energy components of the CPI basket, fell to 0.70% on an annualized basis through the end of March.  Besides the slowest growth in 12 months, the figure underscores the lack of momentum in prices, something the ECB is keen to witness before contemplating any adjustments to monetary policy.  Although speculation was high that the timeline for removing accommodation might be shorter than initially expected, after the last decision of the Governing Council, the meeting minutes quickly extinguished those hopes.

The predominant reason inflation has been off to the races over the last year is not just the highly accommodative efforts of the ECB, but the gradually ebbing energy price collapse.  Energy prices alone were enough to catalyze an enormous uptick in inflation since bottoming last March.  These inflationary measures are for 12-months, so the once the effect of the steep drop in prices is eliminated, energy inflation is also likely to see momentum pullback.

The clearest evidence of this development was from earlier data which showed fuel prices growing by only 13.10% in March compared to 16.70% in February as heating oil fell to a 20.80% increase from 30.00% a month earlier.  Add to the mix slower growth in food prices and falling prices for telecommunications and suddenly the ECB may be forced to keep accommodation in place far longer than anticipated.  Therefore, any ECB plans to extend asset purchases if inflation continues to retreat could pressure the Euro even lower over the medium-term as they seek to restore price growth.

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