Tuesday 22 January 2019

Eurozone inflation spiked towards ECB target in May

Sabine Lautenschlaeger has made case for ending bond-buying
Sabine Lautenschlaeger has made case for ending bond-buying

Robert-Jan Bartunek

Eurozone inflation jumped far more than expected in May on higher energy costs, offering relief to the European Central Bank (ECB) after market turbulence that has jeopardised its planned exit from a lavish stimulus programme.

Inflation in the 19 countries sharing the euro rose to 1.9pc from 1.2pc in April, EU statistics office Eurostat said yesterday as surging oil prices quickly fed through to consumers.

Excluding volatile energy and unprocessed food prices, inflation was 1.3pc, from 1.1pc in April. Another core inflation measure, also excluding alcohol and tobacco, was 1.1pc in May, from 0.7pc in April.

The ECB has a mandate to keep inflation below but close to 2pc, a task that has proven challenging as, even with economic growth on its best run in a decade, price pressures have remained stubbornly subdued.

The ECB has spent months setting up investors for an end to its €2.55 trillion bond purchase scheme.

However, political crises in Italy and, potentially, Spain risk reigniting market turbulence on the bloc's periphery and derailing the bank's exit strategy.

Indeed, ten-year Italian yields surged to a four-year high this week with Spanish, Portuguese and Greek yields also moving higher. The ECB has already amassed €2 trillion worth of sovereign debt and will stay in the market at least until the end of September.

Economists at ING noted that the conundrum faced by the ECB was not made any easier by yesterday's data, as core inflation was still low and they faced possible economic shocks from a looming trade war with the United States and political uncertainty.

"After years of pushing for inflation to return to just under 2pc, it could not have come at a more difficult time," ING wrote in a note to clients.

But policymakers have long argued that the bank's mandate is to oversee inflation, not help countries out of difficulties, suggesting little appetite now to give up plans to normalise policy.

ECB board members Benoit Coeure and Sabine Lautenschlaeger both made the case in recent days for ending bond purchases this year and Thursday's data is likely to support their case.

While policymakers tend to look past oil price shocks, some of them privately argue that the inflation rise over the coming months may bolster their case to end the bond buys even if they know the surge is temporary and the actual inflation picture is more benign. (Reuters)

Irish Independent

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