Growth gathering momentum, but where’s the inflation?
Industrial output in the Eurozone rose faster than anyone polled by Reuters expected in August
The Eurozone economy may be building up an impressive head of steam that shows no signs of cooling, but what policymakers at the European Central Bank really want — higher inflation — is still largely absent.
Industrial output in the bloc rose faster than anyone polled by Reuters expected in August, according to data on Thursday which followed a slew of forecast-beating releases and after the International Monetary Fund upgraded its outlook for global growth.
“Although the industrial sector only accounts for a quarter of GDP it has been the Eurozone’s most cyclical sector historically, and so is an important indicator of the economy’s wider health,” said Christian Jaccarini at CEBR.
“With the economy gathering momentum, the European Central Bank should feel confident about starting to taper its asset purchase programme at the beginning of next year.” The economy is performing stronger than at any time since the global crisis so talk the ECB will begin scaling back its massive stimulus programme has been rife.
Policymakers at the Bank will announce on October 26 a six-month extension to its asset purchase programme but will cut how much it buys Five people with direct knowledge of discussions told Reuters the ECB is homing in on extending its stimulus for nine months at the next meeting while scaling it back.
Yet the ECB’s key focus is inflation and numbers due on Tuesday will probably confirm prices only rose 1.5 per cent in September on a year ago, still a lot weaker than the just below 2 per cent rate-setters would like. According to Reuters polls taken throughout 2017, which have been correct about how low it would remain this year, inflation won’t hit that ECB target for years.
“There is likely to be only a limited pickup in inflationary pressures, meaning that interest rate hikes can be kept on hold until 2019 — later than markets seem to expect,” economists at Capital Economics wrote. each month to €40 billion from January, a September Reuters poll predicted.
British dilemma
Across the Atlantic, US Federal Reserve policymakers have already begun tightening but had a prolonged debate about the prospects of a pickup in inflation and slowing the path of future interest rate rises if it did not, according to minutes of the central bank’s last policy meeting.
“Many participants expressed concern that the low inflation readings this year might reflect ... the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted,” the Fed said in the minutes. Britain, however, has the opposite problem.
Since the vote in June 2016 to leave the European Union, the pound has lost around 13 per cent of its value against the dollar, driving up the costs of imports and caused inflation to run well above the 2 per cent the Bank of England would like it at.
In the referendum’s aftermath the Bank cut 25 basis points from borrowing costs, taking them to a record low 0.25 per cent, hoping to stave off a predicted economic meltdown after the leave vote.
That meltdown never happened and Britain’s economy was one of the best performers last year although growth has since slowed sharply.
Still, at its November meeting the BoE will raise interest rates for the first time in a decade, according to economists in a recent Reuters poll taken after a barrage of hawkish rhetoric from BoE policymakers. However, most of them also said raising rates now would be a policy mistake. On the strength of the MPC’s rhetoric, we continue to look for a November hike,” said Allan Monks at JPMorgan.