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Possibility of the ECB cutting inflation target

Economists from the Swiss financial group UBS said there is a grim outlook for growth in Europe for the coming years, which could lead the European Central Bank (ECB) to lower its target for inflation as soon as next year.

In a report on Europe’s economic and institutional outlook until 2050, UBS have calculated the European Union would need to admit 1.8 million immigrants to match the workforce expansion which has helped the US economy over the past decade [1].

The European economy grew around 0.3% in Quarter 3 and 0.4% in Quarter 4 of 2015, with the European Commission’s measure of economic sentiment indicating annual growth of 2% or more [2].

Although there are indications that the rebound in consumer spending is weakening. According to the monthly retail sales data, household spending is expected to slow down further in 2016 as increases in real-value incomes from lower inflation reverses.

It is expected that, by the end of 2016, inflation will increase to around 1%, even if euro and oil prices are stable, with export prices seen to be weakening [2].

These figures, alongside China’s market turmoil, are expected to put added pressure on the ECB to relook at its fiscal policy. The policy has seen a poor outlook following a meeting in December 2015, where it was announced the Central Bank would further lower its interest rate going into 2016 [3].

Peter Chatwell, Head of Rates Strategy at Mizuho International plc in London, said: “We expect the ECB to increase the pace of the public-sector purchase program. If they do not, we expect inflation expectations will fall even further [3].

“The ECB needs to do more, and this should keep the euro-area rates markets bullish in the near term,” he added [3].

Eurozone inflation remains close to zero, despite the ECB cutting interest rates into negative territory, thus bringing billions into the economy. The UBS report follows talks among bankers about whether the ECB will have to rethink its inflation target of close to, but less than, 2% [1].

 

[1] Reuters UK. ‘Era of stagnation will make ECB cut inflation target, UBS says’. uk.reuters.com

[2] Econo Times. ‘Euro area economic growth likely to slow in 2016’. econotimes.com

[3] Bloomberg Business. ‘Europe’s weakening inflation outlook spurs calls for ECB action’. bloomberg.com