ECB will look through inflation in short term, according to the President of the central bank, Mario Draghi. He stressed that EU needs the support from ECB.
14 February, Orbex – The European Central Bank president, Mario Draghi, in a testimony to the European Parliament on Monday stressed that the Eurozone’s economy required the support of the central bank’s monetary policy to enable inflation to return to the central bank’s target level of 2%.
ECB will look through inflation in short term
Speaking to lawmakers in Brussels, Draghi brushed aside talk of tapering QE amid the recent uptick in consumer prices. Germany was the most vocal opponent and at times publicly accusing the ECB of pursuing ultra-loose monetary policy. However, the concerns were brushed aside as Draghi made it clear saying that “the pickup in headline inflation in December and in January largely reflects sizeable upward base effects and recent increases in energy prices.”
Draghi was referring to the recent inflation reports for December and January. Headline consumer prices rose 1.1% in December and January’s flash CPI estimate showed an acceleration in consumer prices to 1.8%. However, the core CPI, which strips the volatile food and energy prices remained unchanged, rising at a steady 0.9%, indicating that most of the gains in consumer prices came on account of higher fuel prices than real inflationary pressures. Mr. Draghi told lawmakers on Monday:
“We, therefore, continue to look through changes in HICP inflation if we believe they do not durably affect the medium-term outlook for price stability.”
Single currency under pressure
The ECB Chief reiterated that the central bank remains committed to inflation targeting. Moreover, he noted that while there were signs of an increase in economic sentiment, the risks remained to the downside. Also, he maintained that if the downside risks increased or of the financial conditions turned unstable, the central bank was prepared to increase its asset purchase program both in size and duration.
Draghi also took a dig at the allegations of currency manipulation levied by officials in the US. He said that the central bank did not intervene in the currency markets since 2011.
The euro also came under pressure as the French election campaign was officially kicked off as leader of the far-right party. Marine Le Pen announced her bid for the French presidency. Ms. Le Pen has been a staunch proponent of pulling France out of the Eurozone which could threaten the very base of the shared currency. Speaking to a crowd of supporters, Ms. Le Pen called the European Union a “failure” and that it failed on its promises of “prosperity and security.”
US data weighs of Fed rate hike chances
The uncertainty was evident as the bond yield spreads between France and Germany rose to the highest levels in over four years as investors started to shed their positions in the French bond markets. Yields on the 10-year French government bonds rose to a high of 1.14% on Monday, about 73 basis points above the benchmark Germany 10-year bonds.
The euro fell over 0.70% on the day. It hit a 4-day low at $1.0704 after the single currency failed to capitalize on the gains made from the previous Friday. The US dollar turned weaker after a mixed payrolls report. The report saw the US economy add 200k+ jobs in January.
Moreover, average hourly earnings were also revised lower to 0.2% in December, down from the initially reported 0.4%. It has left market participants to question the strength of the increase in wage inflation. A few days before, the FOMC decided to leave interest rates unchanged at did not signal any timing for the next rate hike. This neutral/dovish stance from the Fed gained traction after the mixed payrolls report. It which now puts the March rate hike more and more off the table.
About the contributor
This article was written by John Benjamin, Analyst at Orbex – an AtoZ Approved Forex Broker.