Eurozone inflation likely to be a torturous, drawn out slog back to target

8th September 2016 By: Ranko Berich

ECB Meeting – 8/9/16

Today’s ECB presser was more about the hints than what was explicitly said. Draghi and company are dealing with stubborn low inflation dynamics, but with monetary policy already close to its limit, they seem content with waiting rather than spending what little political capital they have left in expanding stimulus further.

The elephant in the room was German fiscal policy. Without veering too far into politics, Draghi explicitly stated that Germany should use the fiscal space it has to encourage growth. This is a distant prospect, and the ECB President noted that fiscal policy across the eurozone would move from being mildly expansionary, to merely neutral, in 2017. Given these circumstances, it seems inflation in the eurozone is likely to be a torturous, drawn out slog back up to target. 

The ECB will almost certainly be forced to extend its QE programme in 2017, and this will involve tweaking its composition. There was no explicit indication of how QE might be enhanced, but Draghi did say that it was something the ECB would be examining at committee level. As Draghi said, credit conditions are slowly improving in the eurozone and this will hopefully, eventually, lift inflation. The question, of course, is if any further political or economic shocks derail this stumble back to target, and if the ECB has any ammunition left to respond.