ECB’s Dilemma Over Inflation

The European Central Bank’s dilemma over barely rising prices seems likely to dominate a week starting with a euro zone inflation estimate and ending with U.S. jobs figures, the monetary policy driver on the other side of the Atlantic. After more than a month of East-West tensions centred on Russia’s annexation of Crimea, U.S. President Barack Obama and Russia’s Vladimir Putin finally spoke to each other on Friday, suggesting a possible diplomatic path out of crisis.

With geopolitical issues calmer, even if not resolved, the financial markets are more likely to be guided more by global economic data and central bank deliberations. The ECB’s Governing Council meets on Thursday and, although the vast majority of economists expect it to hold interest rates, it is wrestling with a response to inflation persistently below its target of below but close to 2 percent.

The first estimate of euro zone inflation for March will be published on Monday. Initial figures from Germany showed EU harmonised inflation easing by slightly more than forecast to 0.9 percent year-on-year, while in Spain consumer prices fell at their steepest annual pace in almost four-and-a-half years.

That could push the level for the euro zone as a whole even below the 0.6 percent consensus from February’s 0.7 percent. The figure is set to be the lowest since November 2009. It will also be a sixth straight month of inflation in the ECB’s “danger zone” of below 1 percent, although the bank can point to energy and food prices as the culprits. A far later Easter this year should also lead to a rebound in April.

The ECB left interest rates on hold and took no new measures to bolster the fragile recovery at its last monthly meeting. Its president, Mario Draghi, suggested then that the bank would either do nothing or take bold action should the outlook deteriorate. That could include buying loans and other assets from banks, something Germany’s Bundesbank, a long-time critic of quantitative easing (QE), accepted last week as a viable option.

For now, most economists believe the ECB will maintain its current course. “I don’t think there’ll be enough for the ECB to deliver something next week. We do see this happening in June, when there will have been a cleaner May inflation figure and new ECB staff forecasts,” said Guillaume Menuet, economist at Citi.