EDITOR: | December 4th, 2015

German, French Central Banks Warn on Slow Price Growth

| December 04, 2015 | No Comments
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December 4, 2015 (Source: Wall Street Journal) The central banks of Germany and France said consumer prices will rise more slowly than they had expected next year and in 2017, underscoring the challenge facing the European Central Bank as it tries to revive inflation in the 19-country currency bloc.

The ECB Thursday cut its already negative deposit rate, extended a bond buying program known as quantitative easing by six months, and announced other measures intended to support economic growth and raise the annual rate of inflation toward its target of just under 2%.

The governing council’s reasons for taking fresh action became clearer Friday, as the Bundesbank said German consumer prices will rise by 1.1% next year and 2% in 2017, having previously forecast increases of 1.8% and 2.2%. The Bank of France said it now expects consumer prices in the eurozone’s second-largest member will rise by just 1% next year and 1.5% in 2017, having previously expected increases of 1.4% in 2016 and 1.7%.

The ECB launched its program of quantitative easing in March. That followed a series of moves similarly aimed at boosting inflation, including cuts to its key interest rates and cheap, medium-term loans to banks.

But despite those efforts, inflation has picked up only modestly. While prices were 0.1% lower in March than a year earlier, by November they were just 0.1% higher. The inflation rate has been below the ECB’s target of just under 2% since the start of 2013, and ECB economists Thursday said they expect it to remain so in 2016 and 2017.

The ECB’s forecasts incorporate the views of economists at the Bundesbank and the Bank of France, and project what would have happened without the fresh stimulus announced Thursday.

In a news conference Thursday, ECB President Mario Draghi said the central bank’s stimulus programs has been successful, despite the continued weakness of inflation, which he attributed largely to slowdowns in China and a number of other large developing economies.

“We are doing more because it works, not because it fails,” he said. “We want to consolidate something that’s been a success.”

The Bundesbank cut its inflation projection despite raising its growth forecast for 2017. Usually, stronger growth would lead to higher inflation, but the Bundesbank said weaker oil prices were having a dampening effect.

Crucially, its forecasts suggest the Bundesbank believed that even without the stimulus measures, Germany’s inflation rate would be roughly in line with the ECB’s target in 2017. That may help explain why Bundesbank President Jens Weidmann opposed Thursday’s moves.

“Considering the dominant role of the energy-price decline for the price development in the eurozone and earlier comprehensive monetary policy measures, that also can have risks and side effects, I did not believe a further loosening of policy was necessary,” he said Thursday.

But while low energy prices have contributed to the eurozone’s inflation problem, the modest nature of its economic recovery has also played a part. The Bank of France Friday cut its economic growth forecasts to 1.4% in 2016 and 1.6% in 2017 from 1.8% and 1.9% previously.

“The recovery should be confirmed in 2016 and 2017, but only very gradually as the international environment proves slightly less favorable than in 2015,” the central bank said in its twice-yearly economic forecasts.

Belgium’s central bank also published new forecasts Friday, saying it expects only a short-lived impact on the economy from the recent terror-related lockdown in Brussels.

“It’s not good for the economy, that’s quite obvious…but I’d say that the impact is [likely] quite temporary,” said Jan Smets, Belgium’s central bank governor and a member of the European Central Bank governing council.

In contrast to his German colleague, Mr. Smets said he backed the ECB’s decision to provide more stimulus.

“I totally agree with the decisions that have been taken,” Mr. Smets said.


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