ECB: Failure to meet inflation target has hurt inflation credibility – ABN AMRO

ECB in its last Governing Council meeting, announced new projections, which suggest that 2021 will be the ninth calendar year in succession that the central bank will fail to meet is inflation objection in terms of the annual year average, notes Nick Kounis, head of financial markets research at ABN AMRO.

Key Quotes

“So there would be a rationale for economic actors to expect a lower inflation outcome in making their decisions, hence perpetuating lower inflation. ECB President Mario Draghi sounded unconcerned about this risk saying that the probability ‘of a de-anchoring of inflation expectations (is) very low in our assessment’.”

“Although the ECB’s panel of professional forecasters see inflation at 1.8% in five years’ time (which is close to the inflation goal of 1.9%), they do have their doubts. Since 2013Q3, they have rated the chances of inflation being below target as being significantly greater than being above target.”

“Our base case is that the central bank will keep interest rates on hold until the end of next year and will maintain re-investments for a year after that. However, there is a rising chance in our view that the central bank will need to do more if it is serious about meeting its inflation goal in a sustainable fashion and breaking the vicious cycle between low inflation expectations and low actual inflation outcomes. This would be made more likely if the governments that have room for manoeuver do not respond to weaker economic growth by stepping up fiscal stimulus. The most likely policy tool is a restart of net purchases under a broad asset purchase programme.”