Danske Banki en gennemgang af Draghis, ECB, hovedpiner:
A number of headaches for Draghi
– Euro inflation only increased to 0.4% y/y in October from 0.3% y/y in September. In October base effects should have supported inflation and given the ECB some relief but the low figure will likely imply that the ECB has to revise its inflation projection lower in December, see Euro inflation slightly higher but more pressure on the ECB, 31 October 2014. Moreover, inflation has now been in Draghi’s previous definition of a ‘danger zone’ (below 1%) for 13 consecutive months. How the ECB sees it. The ECB expected inflation to pick up in Q4 as its latest projection from September implied an increase in inflation to 0.75% in Q4 from 0.4% in Q3 and the small increase in October is likely to be a disappointment. However, the ECB is waiting for the impact of its latest monetary easing, which according to Draghi should be seen 9-12 months after it eased.
– 5y5y inflation expectations have continued to decline after the ECB eased in September and are currently around 1.83%. When the medium-term expectations declined below 2% in August, Draghi expressed concern and afterwards the ECB eased monetary policy further by cutting rates and introducing its CBPP3 and ABS purchases in September. How the ECB sees it. The decline in inflation expectations gives Draghi a headache but in October he downplayed the role of the 5y5y inflation expectations as he said ‘we use a broad range of indicators’. In light of this it is interesting that the ECB will get new information from the Survey of Professional Forecasters at the meeting in November. Last quarter it increased marginally but any sign of de-anchoring will increase the pressure on the ECB further.
– The oil price has continued lower and consequently there was a monthly decline in energy prices in the euro area of 0.7% in October. This is a concern for the ECB as it continues to put downside pressure on headline inflation. How the ECB sees it. The ECB will probably continue to argue that low inflation is mainly the result of the significant drop in the oil price. However, in October last year, the ECB wrote that ‘longer-lasting supply shocks may have a systematic impact on inflation and could affect inflation expectations, meaning that monetary policy should respond to them’. This seems to be the case, but we believe the ECB will argue that it has already eased monetary policy in response to supply shocks.
– Wage growth has declined to the lowest rate of increase in 16 years. Hence there are signs of ‘second round effects’, where workers become satisfied with lower wage increases as inflation is low. If this continues core inflation can go even lower and this is a significant risk for the ECB although real wage growth is the highest since 2010
