Weak inflation figures put pressure on ECB

Posted on August 31, 2016

BERLIN, GERMANY - DECEMBER 17: People carry shopping bags as they leave a C&A department store on a busy shopping street in Steglitz district on December 17, 2012 in Berlin, Germany. Retailers are hoping for a strong Christmas season in Germany, one of the few countries whose economy has so far weathered the current Eurozone debt crisis relatively well. (Photo by Sean Gallup/Getty Images)©Getty

Stubbornly low inflation figures highlighted the fragility of the eurozone recovery on Wednesday, reigniting debate over whether the European Central Bank should take more unconventional actions to boost growth.

Consumer prices rose 0.2 per cent in August in comparison with a year earlier, according to a preliminary estimate from the EU’s statistics office. That was the same rate as in July, but less than the 0.3 per cent expected by economists and well short of the ECB’s target of below, but close to, 2 per cent.

    Core inflation — which strips out energy, alcohol, tobacco and food — slipped for the first time in three months from 0.9 per cent in July to 0.8 per cent in August.

    In a further indication of the weakness of the eurozone’s economy eight years after the advent of the financial crisis, the EU’s statistics arm added that the unemployment rate in the 19-member bloc was 10.1 per cent in July, the same level as in June.

    The ECB’s measures to inject more life into the regional economy — notably negative interest rates and large-scale asset purchases — have stoked much controversy, with German bankers warning that monetary policy was dangerously counterproductive, even as some economists said the latest lacklustre data could push the central bank to go further.

    Julien Lafargue, from JPMorgan Private Bank, said that Wednesday’s inflation data could “reignite the debate on whether more is needed for the central bank to bring inflation back towards its 2 per cent target”.

    Mr Lafargue said he did not expect a rate cut or larger debt purchases to be announced at the ECB’s next monetary policy meeting on September 8, but did expect the ECB to “give a strong indication that the current bond purchasing programme will be extended, probably by at least another six months”.

    In depth

    Eurozone economy

    An employee shows fifty-euro notes in a bank in Sarajevo in this March 19, 2012 file photo. The European Central Bank took the ultimate policy leap on on January 22, 2015 launching a government bond-buying programme which will pump hundreds of billions of new money into a sagging euro zone economy. The Europen Central Bank (ECB) said it would buy government bonds from this March until the end of September 2016 despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will pump 60 billion euros a month into the economy, ECB President Mario Draghi said. Picture taken March 19, 2012. REUTERS/Dado Ruvic (BOSNIA AND HERZEGOVINA - Tags: BUSINESS)

    News and analysis of the single currency bloc’s fragile recovery as it attempts to regain competitiveness in the wake of the sovereign debt crisis and its struggles with austerity

    At present, the bank’s €80bn-a-month asset purchase scheme, aimed at driving down government borrowing costs, is planned to run until at least March 2017. The ECB has also cut its deposit rate to minus 0.4 per cent, effectively charging central banks a fee for parking excess deposits with central banks.

    While such policies have bought some breathing space for battered economies and financial systems in southern Europe, they are widely resented in Germany
    , where banks have seen already-thin margins crushed by low interest rates.

    John Cryan, chief executive of Deutsche Bank, told a conference in Frankfurt on Wednesday that “monetary policy is already working against the goal of creating a more secure and stable European banking system”.

    Georg Fahrenschon, head of the German Savings Banks Association, said the next financial crisis would have its roots in “incorrect regulation and fatal monetary policy. Of that I am deeply convinced”.

    Despite such criticism, Benoît Cœuré, a member of the ECB’s executive board, said last week that “if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so”.

    But economists at Allianz, the German insurance group, said that the ECB should take a “relaxed” view of the latest figures. “Very soon inflation rates in the eurozone will move decisively away from zero and inflation expectations will also rise again,” they wrote.

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