Reviving Eurozone Inflation Long Way Off

The eurozone economy still needs a long period of easy monetary policy and a shift in message that induced a market selloff last week was merely a nuanced change to reflect better growth, said Peter Praet, European Central Bank’s chief economist.

The ECB still needs to be patient and persistent with stimulus as inflation is a “long way” from getting back to the ECB’s 2% target, Praet told Belgian newspaper De Standaard, likely hoping to temper expectations of an imminent policy shift, Reuters reported.

ECB president Mario Draghi stirred markets last week when he argued that better growth in itself would provide increased support, allowing the ECB to curb its own stimulus to keep the overall level of accommodation broadly unchanged.

That message was taken as a signal that the ECB could announce as soon as September a reduction in asset buys, already running for over two years with the aim of reviving spending, growth and eventually inflation.

“I see it more as an evolution in our communications,” Praet, a key Draghi ally said, according to an interview published on Saturday. “The tone was rather optimistic regarding growth, and rightly so.”

“Now indeed inflation is picking up, but that is a process that is a long way from completion,” Praet added. “The process of reflation is a long one that remains highly dependent on accommodative monetary policy.”

The ECB will decide in September or October whether to wind down its €2.3 trillion ($2.62 trillion) bond buying scheme from next year or extend the buys, having to resolve an apparent contradiction between accelerating growth and subdued inflation.

Last week, eurozone bond yields jumped as much as 12-basis points as minutes from the ECB’s latest meeting showed policymakers are open to a further step toward reducing monetary stimulus.

They were thrust higher after data showed the US economy added more jobs than expected in June and employers increased hours for workers, signs of labor market strength.

“We need to be patient because inflation convergence needs more time,” Praet said. “And we need to be persistent because our baseline for future inflation remains crucially contingent on very easy financing conditions.”

“As the economic prospects brighten, higher expected returns on business investment will make borrowing conditions increasingly attractive,” Praet said. “This will reinforce accommodation.”