Author: Claire Jones
Posted on: Financial Times |December 14th, 2017

 

The European Central Bank has revised its growth and inflation forecasts upwards as the eurozone recovery powers ahead — but the region is still set to miss its target for prices this decade.

Speaking after a governing council meeting in Frankfurt on Thursday that kept interest rates at record lows, Mario Draghi hailed the “strong pace of economic expansion and a significant improvement in the growth outlook”.

But despite his upbeat account on growth, the ECB president said muted domestic price pressures had “yet to show convincing signs of a sustained upward trend”, making it important to maintain the bank’s asset purchase programme, which is a divisive issue among the bank’s top officials.

Mr Draghi’s comments on the relatively subdued inflation outlook — and the continuation of the ECB’s ultra-loose monetary policy — came a day after the Federal Reserve increased interest rates for the third time this year, underlining that the eurozone recovery still lags behind that of the US.

The ECB’s latest forecasts suggest that eurozone headline inflation will finish 2017 at 1.5 per cent, before dipping to 1.4 per cent in 2018 and then recovering to 1.5 per cent and 1.7 per cent in 2019 and 2020 respectively.

The figures indicate increased expectations for inflation next year, which the bank’s previous round of forecasts in September put at 1.2 per cent. But they compare poorly with the ECB’s target of below, but close to, 2 per cent. The bank had not previously produced forecasts for 2020.

“An ample degree of monetary stimulus . . . remains necessary for underlying inflation pressures to continue to build up,” Mr Draghi told a press conference.

With the eurozone economy set to remain strong into 2018, other ECB policymakers are keen to call time on the asset purchase programme in the autumn, although Mr Draghi said there had been no discussion at Thursday’s meeting of an end date.

In its statement, the central bank reiterated it “stands ready” to increase the size of the programme, dubbed quantitative easing, in the seemingly unlikely event that the recovery will veer off track.

The central bank confirmed that between January next year and September at the earliest it will buy €30bn a month of bonds — half the current level of €60bn of purchases a month. It added that during this period it would also reinvest the proceeds of any bonds that mature.

The debate on ending the programme is likely to become more heated in the new year if the eurozone recovery maintains its momentum.

“Especially in the labour market the recovery is really quite impressive,” said Guntram Wolff, director of Bruegel, a Brussels-based think-tank. “Wage growth and inflation will eventually follow, but it just takes a little more time.”

Mr Draghi said that risks to growth were “broadly balanced” between the downside and upside. The latest forecasts are for 2017 growth of 2.4 per cent before the economy slows to 2.3 per cent, 1.9 per cent and 1.7 per cent in 2018, 2019 and 2020 respectively.

The previous ECB forecasts, published in September, showed growth hitting 2.2 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019.

The improved performance of the eurozone was highlighted by a closely watched poll of purchasing managers, also released on Thursday, which suggested the economy was now expanding at its fastest pace for almost seven years.

The purchasing managers’ index published by data firm IHS Markit hit 58, well above the crucial 50 level that signifies an expansion in activity, and an 82-month high.

The figures, for November, indicated that manufacturing output was now at its strongest level since the turn of the millennium. The services sector, which dominates economic output, performed at its strongest level since early 2011. Companies also added jobs at the fastest pace for more than 17 years.

Many economists hail the region’s recovery as a success of the QE programme, which began in March 2015 and has so far bought €2.3tn worth of bonds.

The chief missing factor in the region’s recovery has been a rise in wage growth and broader inflationary pressures. However, the ECB projections signalled that the so-called core rate — which unlike headline inflation excludes price changes for goods such as oil and food — would rise to 1.8 per cent by 2020, up from 1.5 per cent in 2019.

The ECB’s governing council kept the benchmark main refinancing rate at zero. The deposit rate will remain at minus 0.4 per cent, a level that in effect imposes a levy on reserves parked by lenders from the private sector at eurozone central banks.

 

Read at: https://www.ft.com/content/dd55bb4c-e0c3-11e7-a8a4-0a1e63a52f9c