June 28, 2019 / 9:42 AM / 4 months ago

Fresh inflation reading little comfort for ECB

BRUSSELS/FRANKFURT (Reuters) - Underlying inflation in the euro zone rebounded in June, offering some comfort to the European Central Bank but still falling short of the improvement policymakers are hoping for.

FILE PHOTO: The euro sign is photographed in front of the former head quarter of the European Central Bank in Frankfurt, Germany, April 9, 2019. Picture is taken on slow shutter speed while zooming. REUTERS/Kai Pfaffenbach/File Photo

With growth and price pressures easing throughout the year, ECB President Mario Draghi has already said that more policy easing will come in the near future unless inflation and growth prospects improve.

Overall inflation held steady as expected at 1.2 percent, well short of the ECB’s target of almost 2 percent, but a closely watched ‘core’ figure, excluding volatile food and energy prices, jumped to 1.2 percent from 1 percent in May.

While the core inflation rebound is impressive, it is in line with expectations and still below April’s reading, suggesting that overall price pressures are modest despite years of extraordinary stimulus from the ECB.

The weak inflation has long puzzled policymakers.

The 19-country currency bloc has created over 10 million jobs since the worst days of its debt crisis and employment is the highest on record. Wages are also rising relatively fast, creating the textbook environment for higher prices.

Yet inflation remains weak as businesses would rather sacrifice their own margins than jack up prices.

The problem is that if prices failed to rise during the boom times, they are unlikely to do so during an economic slowdown.

Euro zone growth is seen at just 1.2 percent this year, less than half the 2017 figure, and a recent string of dismal indicators suggest this may still be an optimistic estimate.

A key euro zone sentiment indicator published on Thursday underperformed expectations and Germany’s widely watched IFO index also disappointed.

The figures only reinforced already widespread expectations that the ECB will cut interest rates either in July or September and lay the groundwork for restarting asset purchases.

Such support is bound to push borrowing costs even lower but may fail to provide significant stimulus as bond yields are already near record highs.

Ten-year German bonds are yielding minus 0.30% and French yields are also negative. This indicates that the biggest support would come in the euro zone’s periphery, particularly Italy, where yields are still relatively high, reflecting its large public debt.

The ECB will next meet on July 25 and investors are split on whether the bank will pull the trigger on stimulus then or wait until its Sept. 12 meeting.

While some investors are advocating an earlier move, changes at the top of the ECB may complicate the process.

Draghi is leaving at the end of October but European leaders have yet to appoint his successor and ECB policymakers may be hesitant to effectively tie the hands of their new president for most of the next year.

Editing by Robin Emmott and Catherine Evans

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