Photographer: Piotr Malecki/Bloomberg

Euro-Area Inflation Slows More Than Predicted on Oil, Food

  • Inflation rate at 1.5% in March; economist estimate 1.8%
  • ECB’s Coeure signals it’s not yet time to change policy view

Inflation in the euro area slowed for the first time in nearly a year this month, which may reinforce the view among some European Central Bank policy makers that it’s too soon to start unwinding unconventional stimulus.

The 1.5 percent rate of price growth in March was down from 2 percent in February and weaker than economists had forecast. The core inflation rate also fell more than expected, to the lowest in nearly a year. The release of the numbers coincided with a speech by ECB Executive Board member Benoit Coeure, who said measures of underlying inflation “remain subdued” and the outlook is “highly conditional on our policy stance.”

The slowdown -- partly reflecting the timing of the Easter holiday -- was predicted by the ECB. While the inflation rate picked up in the past year on the back of the ECB’s bond purchases, the rise has been chiefly due to volatile items such as energy and food. Underlying price pressures are still considered weak, and President Mario Draghi has said he’s looking for further assurances that the medium-term upturn in inflation is sustainable.

“For the ECB, it’s clearly an argument for the doves,” said Frederic Pretet, inflation and rates strategist at Scotiabank. Some policy makers will see the data as an argument to “justify the ongoing stimulus and suggest that the debate on tapering is premature for the time being,” he said.

The core inflation rate, which excludes items like oil and foodstuffs, fell to 0.7 percent in March, after 0.9 percent the month before, the data showed. Economists had expected a reading of 0.8 percent. Consumer price growth in Germany and Spain also weakened more than expected in March.

The better inflation picture -- compared with sub-zero monthly prints in early 2016 -- coincides with data showing a pickup in momentum within the 19-country bloc, even in the face of potential political risks due to Brexit and elections in France. Business sentiment in Germany climbed to the strongest since 2011 in March, and a key gauge of manufacturing and service-sector activity for the region has steadily improved.

After this week, the ECB will reduce monthly purchases of public and private debt to 60 billion euros ($64 billion) a month from 80 billion euros, though it plans to continue the program until at least the end of the year.

The ECB insists that this isn’t tapering -- the scheduled winding down of QE -- but it may turn out to be the beginning of the end as the euro-area recovery solidifies and markets focus on the next step. Coeure said that if policy makers “conclude that an adjustment is needed, we should not hesitate to adapt our communication.”

“We would pay a high price in terms of our credibility if we failed to adapt our forward guidance once we had changed our views on the outlook,” he said.

While officials have their next policy meeting on April 27, a policy change isn’t expected until at least June, when they will have new forecasts.

— With assistance by Andre Tartar, Carolynn Look, and Piotr Skolimowski

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