Euro-area inflation slows, undermining calls for ECB to curb QE

[FRANKFURT] The European Central Bank just got a reminder that it'll have to wait a while longer for price pressures to pick up, despite solid economic growth and declining unemployment.

Euro-area inflation slowed to 1.4 per cent last month from November's 1.5 per cent, and the underlying rate unexpectedly failed to accelerate, instead holding at 0.9 per cent. The data highlight the challenge the ECB faces in judging when to unwind its crisis-era stimulus measures, even as some Governing Council members warn of the risks of postponing the decision for too long.

With multiple reports showing robust and largely synchronized economic growth in the currency bloc, sentiment may be shifting in the 25-member Governing Council. Public comments in recent weeks have seen typically hawkish officials such as Germany's Jens Weidmann and Sabine Lautenschlaeger finding some of their views echoed by influential policy makers including Executive Board member Benoit Coeure, a key architect of quantitative easing.

At the same time, consumer-price growth remains short of the goal of just under 2 per cent, and the ECB forecasts that gains will remain subdued for most of this year before picking up. The central bank sees core inflation, which excludes volatile items such as food, energy and tobacco, as an important indicator of where the headline rate will settle.

"It could be something of a roller-coaster ride for headline inflation because of oil prices, but what remains crucial is core," Nick Kounis, head of financial markets research at ABN Amro in Amsterdam, said before the report. "If we're going to see flattish core inflation prints - and if we see flattish wage prints - then that would make the ECB cautious." The pace of QE was halved this year to 30 billion euros (S$48 billion) a month, though President Mario Draghi reiterated after the Dec 14 policy meeting that buying will run to September and could be extended again. Holdings will climb to at least 2.55 trillion euros, and the deposit rate of minus 0.4 per cent won't be raised until well after purchases stop.

The account of that meeting will be published on Jan 11, and may give some insight into how divided policy makers are as they head into 2018. Some have already laid out their position.

Mr Coeure, responsible for the ECB's market operations, said in an interview with Caixin Global last month that there was a "reasonable chance" the latest extension of asset purchases will be the last.

His colleague Yves Mersch told Germany's Boersen-Zeitung that the central bank must be careful not to act so tentatively that its falls "behind the curve." While advocating caution in exiting from stimulus, he favors a decision before the summer.

Austria's central-bank governor, Ewald Nowotny, said in an interview with Sueddeutsche Zeitung that the end of the bond-buying program is "within sight." Those views are supported by surveys showing private-sector economic activity in the euro area at its strongest in almost seven years in December. German unemployment fell to a record low and Spanish jobless claims sank the most since June.

In a sign that wage pressures may start to rise, Germany's IG Metall is pushing for a 6 per cent pay increase on behalf of 3.9 million metalworkers and engineers. The talks will resume next week after an initial deadline to reach an agreement passed on Dec 31.

Still, Mr Draghi hasn't spoken publicly recently, and nor have typically dovish officials such as Vice President Vitor Constancio and Executive Board member Peter Praet, the institution's chief economist. The ECB's next policy meeting is scheduled for Jan. 25.

"I would be cautious in interpreting this push from hawks as something which represents a general view until you hear people like Praet talking," said Kounis. "However, it feels reasonable that six months down the line they may decide to not go further with another extension."

BLOOMBERG