UK Edition
Oil rally gives ECB inflation forecasts a boost for first time since QE began
Rising oil prices have given the European Central Bank a rare opportunity to revise upwards its price growth forecasts, as it continues its battle with deflation.
Economists at the bank will unveil higher inflation forecasts for this year, analysts said, reflecting a rise in the price of Brent crude of more than 75pc since January. The increase in the inflation projection will be the first since the ECB began quantitative easing in early 2015. It comes after the cost of a single barrel of Brent rose about $50 this week.
The development is welcome news for the bank, which will unveil its latest economic forecasts on Thursday, having failed to reach its inflation target of close to 2pc for three years.
Combined with stronger-than-anticipated growth in the first quarter, analysts at Citi expect the oil effect to mean the ECB pushes up its forecast for inflation this year from 0.1pc to 0.3pc. The Wall Street bank anticipates that projections for the two years thereafter will be nudged up to 1.5pc and 1.8pc.
Elga Bartsch, a Morgan Stanley economist, said that 2016’s inflation forecast could be pushed even higher, to 0.4pc.
Any improvement would come as a relief for Mario Draghi, the ECB president, as on the most recent data, the euro area returned to deflation. Inflation figures published on Tuesday are expected to reveal that prices continued to fall in the year to May.
Yet an upbeat tone on inflation will risk alarming investors, analysts said, as markets have become used to the ECB needing to dump stimuli onto the euro area economy.
Tuuli Koivu, a Nordea economist, said it would be “exceptionally challenging” for Mr Draghi not to rattle the markets next week, when he discusses the forecasts.
Ms Koivu warned that the Italian central bank chief could prompt an “unintentional tightening” in the economy, if his comments are interpreted as support for the withdrawal of any monetary stimulus.
The ECB has yet to unleash two more stimulus measures – purchases of corporate debt and cheap loans to banks – announced at its March policy meeting. Combined with the rising oil price, central bankers are unlikely to unveil any new tools next week.
Newer measures could lead to stronger predictions for growth, Ms Bartsch said. However, she added that “after a good start to 2016, euro area growth seems to be losing momentum again”. Morgan Stanley anticipates that eurozone GDP increases will slow from the 0.5pc gain achieved in the first quarter.