Inflation in euro zone expected to escalate

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Copy of br ecb Bloomberg Slowing inflation has confronted European Central Bank policymakers with the risk that they will have to take action to head off deflationary pressures, but better-than-forecast economic data has eased the immediate need to cut interest rates. Photo: Bloomberg

Bloomberg Frankfurt and London

inflation in the euro zone would accelerate over the next two-and-a-half years, European Central Bank (ECB) president Mario Draghi said yesterday, signalling that deflation risks facing the economy may abate.

Draghi, who presented new economic and inflation projections, also reiterated the ECB’s commitment to keeping interest rates low for “an extended period” to shore up the economy’s recovery.

Policymakers kept the ECB benchmark rate at a record low of 0.25 percent yesterday.

Slowing inflation has confronted policymakers with the risk that they will have to take action to head off deflationary pressures. A better-than-forecast month for economic data, including an acceleration of inflation, has eased the immediate need to cut interest rates.

The latest numbers “fully confirm our decision to maintain an accommodative stance for as long as necessary”, Draghi said. At the same time, he stressed it might take almost three years for inflation to return to the ECB’s target level of below but close to 2 percent.

Inflation, which was at 0.8 percent last month, would accelerate to 1.7 percent in the fourth quarter of 2016, he said, noting that consumer prices would rise 1 percent this year.

He said ECB officials saw inflation at 1.3 percent next year and an average rate of 1.5 percent in 2016.

Meanwhile Bank of England policymakers extended unprecedented stimulus into a sixth year yesterday as they seek to ensure the economy fully recovers from the damage wrought by the financial crisis.

The monetary policy committee led by governor Mark Carney held its benchmark interest rate at 0.5 percent, as predicted by all 52 economists in a survey.

The bank has maintained borrowing costs at a record low since March 2009, the longest stretch of unchanged policy since the 1940s.

The bank also said it would reinvest funds from gilts that mature today in its asset purchase facility.

Carney said there was “no rush” to remove the emergency stimulus put in place by his predecessor, Mervyn King, even after the strongest expansion since 2007 pushed unemployment towards the 7 percent level at which officials had said they would consider a rate increase.

With signs the economic recovery is becoming entrenched, traders are betting the central bank will lift borrowing costs next year after officials raised their growth forecasts last month.

Britain’s emergency stimulus has helped to lower government borrowing costs, which act as a benchmark for commercial loans.


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