ECB's Coeure says markets may be overly pessimistic on inflation

[FRANKFURT] European Central Bank (ECB) Executive Board member Benoit Coeure struck a note of caution about markets' downbeat outlook for inflation, citing "tentative evidence" that households' predictions weren't as dour.

"The pessimism priced into bond markets today may not necessarily presage downward pressure on inflation tomorrow - at least not to the same extent," said Mr Coeure, the ECB's head of market operations.

Market-based inflation expectations have plunged this year and ECB President Mario Draghi has pledged he'll add monetary stimulus if the outlook doesn't improve. With economic reports mixed at best, investors are betting the central bank will further cut rates, already at a record low, by September.

Speaking in Frankfurt on Thursday, Mr Coeure said an analysis by ECB staff suggested that market-based measures are more in line with survey-based data when risk premiums are factored in. Unlike investors, households' inflation expectations remained stable since the start of the year and were still close to a six-year high.

"All this confirms the need for central banks to consider and analyze developments in a broad set of inflation expectations indicators," said Mr Coeure, who was a driving force behind quantitative easing when it was introduced.

Economists mostly expect the Governing Council to change its policy language at its July 25 meeting to show that rates might fall -- the current wording says they'll stay at "present levels at least through the first half of 2020" - and reduce the deposit rate by 10 basis points to minus 0.5 per cent in September. The ECB could also restart its bond-buying program despite halting it at 2.6 trillion euros (S$3.97 trillion) at the end of last year.

Nick Kounis, an economist at ABN Amro in Amsterdam, has suggested that the ECB's Executive Board might want to ease policy as soon as the next meeting. Chief economist Philip Lane said this week that central banks must be "proactive." Mr Lane will write the board's policy proposal and he and Mr Coeure will make presentations to the Governing Council.

The European Commission on Wednesday cut its euro-area growth and inflation forecast for next year as trade tensions and policy uncertainty weigh on the region. That strengthens the case for ECB action.

A key reason to wait might be the US Federal Reserve's policy meeting on July 30-31, a week after the ECB. A Fed cut could push the euro higher against the dollar, further damping euro-zone inflation and giving the Governing Council reason to step up its own stimulus.

BLOOMBERG