Timid inflation pickup first clue for draghi mulling action

[FRANKFURT] Mario Draghi is about to receive his first major clue of 2016 on whether the euro area needs more stimulus.

Inflation picked up to 0.4 per cent in January from 0.2 per cent the previous month, according to a Bloomberg Surveybefore data due Friday. While that would be the highest rate in 15 months, it's still only a fraction of the goal of just under 2 per cent - a target the European Central Bank president hasn't met in nearly three years.

Plummeting oil prices and a China-led slowdown in emerging markets have dimmed hopes for an inflation rebound in the 19- nation euro area, and Draghi has warned that the rate may even fall below zero in coming months. Persistent declines in the cost of crude and other commodities have become increasingly correlated with weaker inflation expectations, meaning their deterioration could warrant another expansion of quantitative easing or a cut to the deposit rate.

"The ECB is still very much in a disinflation-fighting stance," said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam, who projects more stimulus in March. Draghi has made clear that "they want to do everything they can to prevent inflation expectations from becoming dislodged," she said.

The five-year, five-year forward inflation-swap rate, one measure of inflation expectations that Draghi has said he watches, is near the lowest level since January last year, when policy makers first announced large-scale asset purchases.

Professional forecasters surveyed by the ECB cut their inflation outlook for this year and next to 0.7 per cent and 1.4 per cent. They see it averaging 1.6 per cent in 2018, a level that the Frankfurt-based central bank predictedless than two months ago would be reached in 2017. The ECB will publish its own projections in March.

"Inflation rates are currently expected to remain at very low or negative levels in the coming months and to pick up only later in 2016," Draghi said on Thursday after the ECB kept interest rates and its 1.5 trillion-euro (S$2.28 trillion) QE plan unchanged. "We're doing whatever is necessary to comply with our mandate, and we're not surrendering in front of these global factors." Even core inflation, which strips out volatile items such as food and energy and which Draghi has said can be a signal for future headline inflation, is weak. The European Union's statistics office will say the measure held steady at 0.9 per cent in January, based on the median projection of economists in a separate survey.

The external factors dragging inflation lower contrast with improving euro-area domestic data such as falling joblessness and strengthening economic growth. Unemployment has dropped to 10.5 per cent, the lowest level since 2011, and expansion probably accelerated to 1.5 per cent last year from 0.9 per cent in 2014.

A report on consumer and business sentiment scheduled for Thursday will offer additional clues about how the economy is shaping up. Economic confidence is forecast to ease in January after reaching the highest in almost five years in December.

In Germany, the Ifo institute's business-climate index fell for a second month in January, with gauges for companies' assessment of current conditions and expectations both deteriorating, according to a report published Monday.

So far, the euro-area economy has been more resilient than the global economy, according to Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt. Whether that holds up will be a crucial determinant of what the ECB does in March.

"The question is whether the sentiment indicators, and more importantly the hard data, follow this path, or whether we see a downward correction," he said.

BLOOMBERG