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ECB April Preview – No changes expected as inflation remains tame

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  • ECB meets in the backdrop of the French elections
  • No changes to monetary policy are expected at this week’s meeting
  • ECB officials maintain that current policy is appropriate
  • Only concrete signs of an increase in inflation will see an appropriate policy response from ECB officials

The European Central Bank will be meeting this week on April 27. No changes to monetary policy are expected at this week’s meeting as the central bank meets amid a high level of uncertainty on the back of the French elections where the focus turns to the second round due in May.

Tame inflation expected to keep officials muted

The central bank is likely to maintain its forward guidance with the likelihood of stressing that it will maintain an accommodative stance on easy monetary policy. Recent inflation figures showed that after a brief spell of inflationary pressures, both the headline and core inflation rate slipped in March.

While the headline CPI made news a few weeks ago as inflation touched 2%, the 1.5% rise in March on the headline consumer prices and a 0.7% rise in the core inflation rate which was slower than the previous months are likely to weigh on the ECB officials.

Eurozone Inflation Rate, March 2017: 1.5% YoY
Eurozone Inflation Rate, March 2017: 1.5% YoY

The central bank had maintained a cautious stance even before, despite some calls from within the governing council calling for the central bank to come out more hawkish. Back then, ECB officials flagged the core CPI as a main metric citing that while headline consumer prices rose, the core CPI failed to rise.

Oil and energy prices were one of the main factors behind the increase in the headline inflation rate thus indicating that the broader measure of inflationary pressures was still missing. In March, energy prices rose 7.4%, down from 9.3% increase registered the month before.

According to the Eurostat, inflation fell in 17 member states compared to the previous month, while six member states registered an increase in inflation and remained stable in six other member states. Energy prices and food contributed to the inflation rate while telecommunications, travel and clothing pushed inflation lower.

Last week, ECB officials which included Peter Praet the chief economist, Benoit Coeure, executive board member and Villeroy de Galhau, French central bank governor spoke on different occasions but maintained a uniform tone that ECB will maintain its easy monetary policy.

The ECB will be looking into a crucial week as the French election led uncertainty is likely to put pressure on the French bonds which could push up the borrowing costs, despite the fact that the ECB is the biggest buyer of the sovereign bonds.

The central bank officials noted that while the ECB is optimistic on the pickup in growth and the broader economy, it was still too premature to think about removing the current stimulus program.

Villeroy said that the current monetary policy was appropriate and any adjustments will be made only on concrete signs of an uptick in inflation. This will mean that the core CPI will need to move higher from the current 0.7% in order for any hopes of tightening from the central bank.

Last week, the IMF released its spring issue of the World economic outlook. In the report, the institution upgraded its 2017 outlook on the back of a post-election surge in consumer confidence and a better than expected prospects from the emerging markets that were seen to boost global trade.

Global growth, according to the IMF is expected to grow 3.5% in 2017 and 3.6% in 2018, up from 3.1% in 2016. For the eurozone, the IMF said that economic recovery is expected to expand at a pace of 1.7% in 2017, which is 0.1 percentage point higher from the January estimate, putting the expansion at the same rate as in 2016.

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