Slowing eurozone inflation helps Draghi push back exit debate

The rate of price growth slowed to 1.2% this month from 1.3%, dropping to its weakest since 2016. The core measure was unchanged at 1%. The figures follow a series of releases that have checked the economy’s thundering momentum at the start of 2018, which had emboldened policy makers who want a faster unwinding of the central bank’s crisis-era monetary stimulus.

Draghi emphasised to European lawmakers this week that an expansionary policy is still warranted even as the economic situation is “improving constantly.” At the same time, he’s more confident that declining unemployment will boost pay and inflation eventually, even if the rate remains below the ECB’s target of just under 2% for now.

The ECB’s Governing Council meets next week and is likely to discuss a change in its policy language to pave the way for an end of quantitative easing. Executive Board member Benoit Coeure - an architect of the program who has more recently taken a hawkish turn - said last week that the ECB can afford to slow bond purchases, as long as it gives clear guidance on the path of interest rates.

Bundesbank President Jens Weidmann, who has long argued in favor of unwinding stimulus, chimed in on Tuesday, saying in a Bloomberg TV interview that the ECB’s guidance on interest rates is “rather vague” and could be strengthened as the end of bond buying approaches.

Moderating momentum

The European Commission said on Tuesday eurozone economic sentiment slipped for a second month in February after touching a 17-year high in December. Data last week showed business confidence in Germany and manufacturing and services activity in the eurozone all weakened more than economists forecast.

Such bumps along the road of Europe’s recovery from the ravages of its debt crisis underscore why Draghi is not yet ready to pare back support for the eurozone. Economic slack may be bigger than thought, and policy makers must remain persistent in providing monetary accommodation, he said.

Inflation in Germany slowed to 1.2% in February, more than economists predicted, while the French rate unexpectedly dropped to 1.3%.

“While core inflation is likely to edge up in coming months, inflation pressures remain muted,” Carsten Hesse, an economist at Berenberg Bank in London, wrote in a client note before Wednesday’s release. “This supports a continuation of the accommodative monetary policy stance of the ECB.”