Draghi Says ECB Will Still Undershoot Inflation Goal in 2020
Comment of the Day

December 14 2017

Commentary by Eoin Treacy

Draghi Says ECB Will Still Undershoot Inflation Goal in 2020

This article by Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section: 

Rather than hitting a single number, it is more important that inflation converges to the target in a self-sustained and durable manner, he said. Improving conditions in the labor market should increase pressure on nominal wages, which are a key driver of underlying price pressures.

The ECB chief’s caution comes amid a spate of central-bank decisions in the past 24 hours that signaled tighter global monetary policies ahead. The U.S. Federal Reserve announced its third interest-rate increase of the year, China unexpectedly edged borrowing costs higher, and Norway’s central bank signaled that it may start raising interest rates earlier than previously.

The Swiss National Bank predicted inflation will exceed its mandate in late 2020, though said it won’t rush to raise rates. The Bank of England, which increased rates last month for the first time in a decade, kept policy on hold in London.

Bolstered by ECB stimulus and a global economic recovery, the euro area has recorded 18 straight quarters of expansion since coming out of a double-dip recession, and sentiment surveys point to accelerating momentum. Upside growth surprises are possible, while downside risks are mostly related global factors, Draghi said.

Eoin Treacy's view

The Fed has telegraphed three interest rate hikes next year and the ECB is about to start tapering but will lag in raising rates. The Bank of England unwound a panicky cut following Brexit but will probably be the first major central bank to embark on tightening after the Fed. The Bank of Japan is still engaged in quantitative easing. Meanwhile the People’s Bank of China is pursuing a two-pronged approach by tightening credit conditions for banks but is not raising rates and is also still running easy money programs for some sectors.

When we aggregate the data, central bank balance sheets when redenominated to US Dollar are climbing towards $20 trillion. Despite all the headlines about the beginning of tightening there is no evidence of it in central bank balance sheets when looked as a complete set. That’s an important enabler for continued growth in stock market performance because capital is both global and mobile.

Nevertheless, this is an important measure to monitor as the ECB tapers and the Bank of Japan considers how to begin to taper. With the Federal Reserve likely to persist in raising rates the onus for monetary accommodation on a global basis is falling on fewer central banks.

The MSCI World Index hit a new high today and is now susceptible to some consolidation. However, a break in the rivetingly consistent progression of higher reaction lows would be required to question the overall uptrend. 

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