Singing from the same hymn sheet

Three European Central Bank policymakers stuck with an upbeat assessment of the Eurozone economy on Monday, shrugging off signs of a slowdown in inflation and activity.

Bank of France Governor Francois Villeroy de Galhau and ECB Executive Board members Sabine Lautenschlaeger and Peter Praet all said a recent easing of price growth was likely to be temporary, signalling the central bank was still on course to withdraw its monetary stimulus.

Villeroy went as far as saying the ECB could soon clarify the timing of its first increase in interest rates since 2011, which he expects to happen “some quarters” after the end of its bond-buying programme. Markets broadly expect the stimulus programme to end in December and be followed by a rate-hike towards the middle of next year, though some analysts have pushed back their forecasts after a run of subdued data.

So far, the ECB has said rates are to remain at current levels for an “extended period of time, and well past” the conclusion of its the €2.55 trillion money-printing scheme.

On national output, the ECB sees weakness in Q1 as largely a result of strong growth during 2017 and in particular the last two months of the year. However, forward-looking indicators such as delivery times and backlog for orders are seen by the central bank as supporting its view that while growth has peaked and the Eurozone economy is no longer accelerating, this does not mean the downturn has begun.

On inflation, the April reading is seen as having been impacted by temporary factors, with the timing of Easter in particular playing an important role. These temporary effects will reverse and inflation is expected to resume its progress higher in the coming months.

Overall, while the data over the coming weeks and into the June 14 ECB meeting will be closely watched, the message from the central bank is that it is not yet concerned, especially as market expectations have remained biased toward an end to QE this year.

There has also been some support (ECB’s Jan Smets) for markets pushing out the timing of the first rate-hike from Q2 to Q3 2019, but the ECB does not at this current juncture, want to explicitly focus on signals with regards to the rate-outlook for fear of muddying the communication waters.

Alan McQuaid (14/5/18)
Economist