ECB may need to revise inflation projections amid rising oil prices

Mario Draghi is set to get a bigger taste of inflation, just not in his preferred flavor. Rising oil prices and a weaker euro mean that projections the European Central Bank president released less than a month ago could be revised higher in 2017.

While that’s good news for policy makers who haven’t met their inflation goal in almost four years, it’s also likely to mask continued weakness in the domestic economy.

Faster consumer-price gains could widen divisions in the ECB’s governing council as some officials push for a gradual exit from monetary stimulus and others argue that the upturn is still too frail, especially with political events carrying the potential to hit confidence.

After policy makers agreed on December 8thto extend their bond-buying program, albeit at a slower pace, Mr Draghi warned that “uncertainty prevails everywhere” and said purchases will be stepped up if needed. “There is a difficulty in making forecasts with that high a level of uncertainty because the biggest risks are probably still of a political caliber,” said Anatoli Annenkov, a senior economist at Societe Generale in London.

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“In that sense, it is probably wise for the ECB to take a quite measured approach on the inflation outlook.”

Large-scale bond purchases that started in March 2015 are now scheduled to run until at least the end of 2017, with the monthly pace dropping to €60 billion in April from the current €80 billion. That means they’ll extend through elections in the Netherlands, France and Germany, as well as possible polls in Italy and Greece, all of which could see populist and anti-euro parties gaining ground.

Talks on the UK’s exit from the European Union and the start of Donald Trump’s presidency in the US add to the risks, backing Mr Draghi’s call for caution. Yet at the same time, rising energy costs look set to push up the headline rate of inflation.

Brent crude has surged more than 25 per cent since mid-November, in part due to an agreement by the Organisation of Petroleum Exporting Countries to curb production for the first time in eight years. It was up 0.5 per cent $57.12 a barrel earlier. Those recent gains aren’t taken into account by ECB forecasts that projected consumer-price growth at 1.3 per cent in 2017, and accelerating to 1.7 per cent in 2019 -- not far below the goal of just-under 2 per cent.

Figures due on January 4th will probably show inflation jumped to 1 percent in December from 0.6 per cent in November, according to a Bloomberg survey of economists.

Any sign that the ECB’s price-stability target is in sight could spur more-hawkish members of the Governing Council to call for an end to quantitative easing. Bundesbank president Jens Weidmann said in an interview with German newspaper Bild published on December 26th that waiting until 2019 to tighten policy “would be too late.” “We must act in a forward-looking way,” he said. “That means pulling on the reins as soon as inflation is deemed to be on a sustainable path toward our goal.”

Bloomberg