The European Central Bank (ECB) this morning took the opportunity to both justify it’s recent inaction and to explain future inaction. The publication of the ECB Monthly Bulletin also afforded the Bank the opportunity to revise growth and price stability forecasts for the Eurozone.
Mario Draghi, the ECB Chair, last week explained to a receptive market that deflation was not a major concern for the Governing Council. The market welcomed his statement that price growth would meet the Bank’s 2% target over the course of the next two years. The implication here being that 2%, or as near as makes no difference would be reached by the end of 2015 or shortly thereafter.
This morning’s report would appear to stretch this definition. It clearly stated that annual HICP inflation is projected to be 1.0% in 2014, 1.3% in 2015 and 1.5% in 2016. In the last quarter of 2016, annual HICP inflation is projected to be 1.7%.
Something doesn’t reconcile here. None of the projections within the 2 year time frame come close to the 2% target. Even the extended 3 year forecast is only projecting inflation to reach 1.7%.
Given how close the Eurozone currently is to entering a Japanese style deflationary spiral, two things are surprising. Firstly that the ECB remains unconcerned by lackluster price growth, despite rhetoric from Governing Council members this is difficult to believe. Secondly, the markets failure to react to these revised inflation figures suggests that the Euro has obtained an untouchable status.
Which brings me to the second concerning element of today’s ECB Monthly Bulletin. This statement: “Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports”.
It is understandable that a recovering global economy will lead to greater demand and that the Eurozone economies would be expected to benefit from this. There has to remain concern around the strength of the single currency. Central Banks across the globe, at least the ones in expanding economies that may be in a position to increase demand for Euro area exports, are managing to weaken their currencies. It’s time for the ECB to put the appreciating Euro on their agenda.
To contact the reporter of this story: James Brennan at firstname.lastname@example.org