European Central Bank

December 14, 2017

ECB officials continue to strike a fine balance between hailing a better functioning economy but without encouraging markets to anticipate higher interest rates. The end-year policy review retained a negative 0.4% deposit rate and reiterated that “we continue to expect [rates] to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Quantitative stimulus will continue at a minimum nine more months and not end until “the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” Despite a significantly improved growth outlook and lessening excess capacity, “domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend.”

The disconnection between very robust growth but continuing subdued core inflation is reflected in updated ECB staff forecasts. On the one hand, projected GDP growth was raised by 0.5 percentage points (ppts) next year and by 0.2 ppts in 2019. On the other hand, slightly higher projected CPI inflation in 2018 is ascribed to higher oil and food costs, and the inflation forecast for 2019 is only 1.5%, unchanged from that forecast three months ago. Even as far away as 2020, the staff expected inflation to be just 0.2 ppts higher at 1.7%, and reasonable doubt would seem to exist over whether 1.7% meets the spirit of the inflation target of “below but close to 2.0%.” 1.7% is 0.3 ppts south of 2.0% and just as far away from 1.5% as from 1.9%.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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