ECB Paper Sees Signs Inflation Expectations Are Deanchoring

  • Researchers say forecasts based less on ECB inflation goal
  • Analysts use shorter-term ECB projections, actual inflation

Euro-area inflation expectations have become less dependent on the European Central Bank’s target and more on its shorter-term projections, according to a study of survey-based projections that raises the question of potential risk to the ECB’s credibility.

“Our analysis suggests that in recent years, a period characterized by low inflation, increased economic uncertainty, zero lower bound and unconventional monetary-policy measures, inflation expectations display some signs of deanchoring,” Tomasz Lyziak and Maritta Paloviita said in a working paper published on the central bank’s website on Friday.

The ECB hasn’t reached its inflation goal of just-under 2 percent since early 2013, even though it’s cut interest rates below zero, pumped money into the economy through asset purchases and offered to pay banks to borrow cash. Critics of President Mario Draghi have warned that by pushing deeper into unconventional policies without obvious success, he and his colleagues could lose the trust of investors and the public.

The researchers, from the Polish and Finnish central banks, studied data from the ECB’s Survey of Professional Forecasters and European Commission’s consumer surveys. Their conclusions don’t necessarily reflect the views of ECB policy makers.

The annual inflation rate in the 19-nation euro area was just 0.2 percent in July. It probably barely picked up to 0.3 percent in August, according to a Bloomberg survey of 45 economists before the figures are published next week.

The ECB’s Governing Council is next scheduled to set monetary policy on Sept. 8, when it will again revise its macroeconomic projections. The last prognosis, in June, was for inflation to climb to an average of 1.6 percent in 2018.

“Continuous analysis of deanchoring risks is crucial in monetary policy, especially in the current low-inflation environment,” the researchers said in the paper. “Monetary-policy credibility is built gradually over the years, but we cannot rule out the possibility that it may deteriorate quite rapidly.”

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