ECB's Nowotny Says Euro-Area Core Inflation `Clearly' Below Goal

  • Governing Council member comments at conference in Warsaw
  • Euro drops on speculation remarks signal more stimulus ahead

European Central Bank Governing Council member Ewald Nowotny said both headline and core inflation in the euro area are “clearly” undershooting the institution’s goal, signaling that more stimulus may be needed.

“One has to say that we’re clearly missing our target,” Nowotny said in Warsaw, pointing to ECB forecasts showing inflation would average 0.1 percent this year and 1.1 percent in 2016. “The main fault for this is the dramatic fall in the price of oil and raw materials. One has to say that these are elements the central bank cannot influence, but also core inflation rates are clearly below our target.”

Ewald Nowotny
Ewald Nowotny
Photographer: Akos Stiller/Bloomberg

Nowotny’s comments contrast with remarks three weeks ago when he said core inflation points to an “equilibrium” in consumer prices, and suggests that policy makers are becoming more concerned about the outlook for the euro area’s fragile recovery. While he signaled a preference for governments to play a stronger role, his speech is likely to feed speculation that the ECB will step up its own stimulus measures.

The “comments differ from the recent ‘wait and see’ mantra coming from several ECB policy makers, including President Mario Draghi, regarding the need for more stimulative action,” said Howard Archer, an economist at IHS Global Insight in London. It “will certainly spice up interest in next Thursday’s ECB policy meeting.”

Euro Decline

The euro dropped about half a cent after the remarks and weakened against every major peer. It was down 043 percent at $1.1433 at 2:11 a.m. Frankfurt time, sliding from a seven-week high.

Inflation in the 19-nation currency bloc unexpectedly turned negative in September, at minus 0.1 percent, for the first time since the ECB embarked on its 1.1 trillion-euro ($1.3 trillion) asset-purchase program in March. The central bank’s goal is just under 2 percent. While the ECB doesn’t have a publicly declared target for core inflation, which excludes energy and food, that rate was just 0.9 percent last month, suggesting that it’s also lower than intended. Final estimates for September will be released on Friday.

Even core euro-area inflation is weak
Even core euro-area inflation is weak

Most economists surveyed by Bloomberg last month predicted the central bank will add fresh stimulus, most likely by extending asset-buying past the initial end-date of September 2016 or increasing monthly purchases from the current 60 billion euros. The ECB holds its next monetary-policy meetings on Oct. 22 in Malta and Dec. 3 in Frankfurt, releasing revised macroeconomic forecasts at the second of those.

“If we observe that the evolution of prices is not compatible with the objective of the European Central Bank, the European Central Bank could do what it said it will do, extend the program and non-conventional measures,” Bank of Spain Deputy Governor Fernando Restoy said on Thursday in Madrid.

‘Structural Measures’

Nowotny, who heads the Austrian central bank, was speaking at a conference on boosting competitiveness in the European Union. He reiterated the ECB’s stance that central banks alone can’t create a structural recovery and governments must play their part.

“The ECB is using the monetary-policy instruments available, but in my view it is quite obvious that in the current economic situation additional sets of instruments are necessary,” he said. “These include structural measures.”

Draghi has called for stronger regional institutions such as a euro-area treasury and a full banking union. He told European lawmakers last month that a layer of “fiscal stabilization at the European level” is needed.

“The two biggest challenges that the EU and also the economic and monetary union have to tackle today are anemic growth and uncertainties relating to the future of the EMU, and also to a certain extent to the EU,” Nowotny said, echoing comments Polish central-bank governor Marek Belka made at the same event. “We need stronger economic growth which will reduce unemployment and bring us closer to our goal of price stability.”

Europe’s debt crisis has “left no doubt” that integration isn’t complete, Belka said.

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