Eurozone inflation data raises prospect of fresh ECB stimulus

European Central Bank could expand quantitative easing and cut deposit rate further, while Fed is expected to raise US rates after strong job growth figures

The European Central Bank president, Mario Draghi, is widely expected to unleash a fresh round of economy-boosting measures on Thursday, after inflation in the eurozone remained at just 0.1% in November.

City analysts had expected the inflation rate to increase modestly to 0.2% in line with forecasts with a slow but robust recovery in the eurozone’s fortunes.

The continued absence of inflationary pressure, despite the ECB spending €60bn (£42bn) a month buying bonds, underscored predictions that Draghi and his colleagues could be set to take more action, and the euro fell sharply against the dollar on the news.

The ECB could extend its quantitative easing (QE) scheme, which is due to end in September 2016, increase its size, and cut the deposit rate on reserves held at the central bank, which already stands at -0.2%.

That means banks in effect have to pay the ECB for holding their cash, a measure aimed at persuading them to lend money out to businesses and consumers instead.

Jonathan Loynes, chief European economist at Capital Economics, said: “November’s weaker-than-expected eurozone consumer prices figures give a final green light for the ECB to both increase the pace of its asset purchases and cut its deposit rate at tomorrow’s [Thursday’s] policy meeting.”

He added that core inflation, which excludes volatile components such as energy prices, had also dropped, from 1.1% in October to 0.9% in November, suggesting that the eurozone economy is hovering close to deflation.

The most recent growth figures for the eurozone showed it losing steam after Portugal’s economy stalled, Germany’s slowed, and debt-stricken Greece contracted.

Gross domestic product (GDP) across the 19 countries in the single currency bloc rose just 0.3% in the third quarter, according to Eurostat. That defied expectations for growth to hold at 0.4%. Over the year GDP was up 1.6%.

In recent months Brussels has eased concerns that it intends to continue imposing draconian austerity policies across the eurozone. Italy, France and Spain have put forward budget proposals that breach previous constraints on spending and tax cuts. But the effects of looser fiscal policies are expected to take some time to feed into higher output, putting pressure on the ECB to ease monetary policy at its next meeting.

The US Federal Reserve is expected to move in the opposite direction next week after figures showed that employers boosted private-sector hiring in November. The ADP employment report showed private-sector employment increased by 217,000, signalling job growth is likely to be strong enough to support the first Federal Reserve interest rate hike in nearly a decade when policymakers meet on 16 December.

The US Labor Department’s employment report on Friday is expected to show a similar boost to employment, keeping the US central bank on track to raise rates this month.

The Federal Reserve chair, Janet Yellen, said she was “looking forward” to a US interest rate hike, which would be a testament to the economy’s recovery from recession. Speaking in Congress on Wednesday, Yellen sidestepped the question of whether there would be a rate hike next month or not, but said job growth in October pointed to a labour market that was strengthening.

She also reaffirmed her view that the drag on US economic growth and inflation from the slowdown in China and weak conditions in Europe would start to moderate next year.

“When the committee begins to normalise the stance of policy, doing so will be a testament ... to how far our economy has come,” she said, referring to the Fed’s policy-setting committee. “In that sense, it is a day that I expect we all are looking forward to.”

She said further rate rises were likely to be gradual. “An abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” she said.

“Regarding US inflation, I anticipate that the drag from the large declines in prices for crude oil and imports over the past year and a half will diminish next year.

“With less downward pressure on inflation from these factors and some upward pressure from a further tightening in US labour and product markets, I expect inflation to move up to the FOMC’s [federal open-market committee] 2% objective over the next few years,” she added.

The prospect of an increase from 0.25% to 0.5% in US bank base rates triggered a panic in global markets in September as investors scrambled to sell risky assets and buy dollars. Markets are expected to take a rise in December in their stride, though many analysts expect markets to suffer further volatility in the new year.


Heather Stewart and Phillip Inman

The GuardianTramp

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