ECB survey points to weaker inflation this year and next

Thursday 14 August 2014 12.17
ECB's quarterly Survey of Professional Forecasters published today
ECB's quarterly Survey of Professional Forecasters published today

Euro zone inflation will be weaker than previously expected this year and next, an updated survey for the European Central Bank indicated today, darkening the euro zone's economic outlook. 

The quarterly Survey of Professional Forecasters (SPF) also suggested that this year's euro zone growth would be weaker than previously expected.

The news adding to the euro zone's woes after the German economy shrank in the second quarter and France stagnated. 

The survey raises fresh questions about the ECB's threshold for embarking on a policy of quantitative easing (QE) - essentially, printing money to buy assets. 

A Reuters poll of economists conducted btween August 7-12 pointed to a one-in-three chance of the ECB embarking on such an asset purchase programme in 2015. 

Last week, ECB President Mario Draghi told his monthly news conference that the bank's policymaking Governing Council was "unanimous in its commitment" to use measures including QE if its medium-term outlook for inflation were to change. 

Draghi also cited "heightened geopolitical risks" related to the impact on the euro zone economy from the Ukraine crisis. 

Deutsche Bank has cut its 2015 inflation forecast for the 18-member euro zone to 1.1% from 1.2% on the expectation of western European food manufacturers offloading excess output in the euro area as a result of a Russian ban on importing their produce. 

However, some European officials expect that any impact from the Russia sanctions might show up in a more muted rebound, rather than a fall, in already weak food prices. 

The ECB's third-quarter SPF showed a drop in the inflation forecast for this year to 0.7% from 0.9% previously, and a cut in the 2015 projection to 1.2% from 1.3%. 

The ECB targets inflation of just below 2% over the medium term but the annual rate is running at just 0.4%, raising concerns that some countries could see deflation. 

The reasons for the downward revisions cited in the survey were "lower than expected actual inflation outcomes, the general disinflationary environment and an ongoing lagged impact of previous exchange rate and commodity price developments, as well as a slightly softer real economic outlook", the ECB said. 

Some countries on the euro zone periphery, such as Greece, are experiencing deflation as they lower wages and costs to make their economies more competitive. Italy also flirted with deflation in July and Spain has also  experienced price falls.

The forecasters' inflation projection for 2016 was, however, unchanged at 1.5%. The longer-term forecast of 1.9% was up slightly from the 1.8% forecast in the second quarter. 

The forecasters trimmed their growth forecast for this year to 1% from 1.1%. 

Before embarking on any potential QE plan, the ECB is focused first on assessing the impact of a new programme of targeted long-term loans that it announced in June, which it will offer banks from next month. 

The ECB hopes to stimulate lending with the TLTROs (targeted long-term refinancing operations), to encourage investment in the flagging euro zone economy. The ECB launches the first of the TLTROs on September 18. 

At its next policy meeting on September 4, the ECB will release updated forecasts from its staff. ECB staff forecasts published in June pointed to euro zone inflation of 0.7% this year, picking up to 1.1% in 2015 and 1.4% in 2016.