ECB: Meeting account reveals doubts on inflation outlook – ABN AMRO

Nick Kounis, head of financial markets research at ABN AMRO, suggests that the latest ECB Minutes of January meeting has set out a number of factors that officials are grappling with, which could ultimately lower the central bank’s inflation outlook.

Key Quotes

“First, the Governing Council wanted to assess ‘the extent to which the weaker growth momentum might turn out to be more persistent than currently envisaged’. To this end, it took the view that ‘more information, including the March projections, was needed to deepen the analysis and obtain greater clarity before conclusions could be drawn about the medium-term inflation outlook’.”

“Second, another source of uncertainty was ‘the transmission of higher wages to consumer price inflation’. It was noted that ‘there had so far been little response in underlying inflation measures to improving labour market conditions’. One reason was that companies had absorbed higher labour costs in their margins. While this could not go on forever, officials judged that ‘more structural or longer-lasting factors might still be at play, for example related to changes in the competitive environment’.”

“Third, officials noted that ‘recent developments in longer-term inflation expectations’ as measured by ‘market-based and survey-based measures had fallen’.  Given that the ‘short-term outlook for inflation had weakened due to lower oil prices and weak developments in domestic services prices’ there was concern  ‘that there might be a risk that this renewed weakness could start to weigh on inflation expectations if it were to persist’.”

“We continue to take the view that the ECB’s forecasts for core inflation are too high. The current quarter is likely to be the fourth successive one of sub-trend growth. There is still slack in the labour market, which should dampen wage growth. Low inflation expectations will also work in this direction. Furthermore, we take the view that the bargaining power of workers has declined due to globalisation and labour market reforms. Finally, weak demand could curtail corporate pricing power.”

“We think the account is consistent with our base case that the ECB will signal that interest rates will be on hold for longer, while also announcing a new TLTRO. We think interest rates will ultimately be on hold until December 2020.”