Rising EU Inflation affects ECB monetary policy in 2017


Euro Area inflation rate has reached 1.1% in December that is the highest level since 2013. Will rising EU Inflation affect ECB monetary policy in 2017?

10 January, AtoZForex – This year might markets might see the return of inflation to the eurozone. It might, in turn, put the European Central Bank (ECB) in a difficult position. Given that the inflation rate was around 0.0%-0.4% range during 2014- 2016.

On the 9th of January, S&P Global Ratings reported that the increase in oil prices together with the appreciation of the US dollar is driving up Europe’s inflation. The agency anticipates the level of inflation to mark the level of 1.5% in the first quarter of the year. Furthermore, Eurostat has recently reported that eurozone’s inflation went up to 1.1% in December. This is the highest level since 2013.

ECB monetary policy in 2017

According to S&P, there is a possibility that the core inflation may not surge above 1%. Yet, increasing headline inflation puts the ECB in a difficult position. Since the bank has to meet calls for higher interest rates by more hawkish policymakers and by politicians. At the same time, the bank also has to ensure investors that it would not implement any premature stimulus tapering. As it could lead to an unjustified further tightening of financial conditions. Particularly, with political and policy uncertainty prevailing in the union.

In addition, Germany’s BdB banking association stated that low-interest rates cause problems for banks. Hence, it is the right time for the central bank to start thinking about a change in policy direction to match the raise in inflation.

“The low-interest rates are a huge problem for banks, but the ECB’s interest rate turnaround should be implemented carefully”.

Jens Spahn German Deputy Finance Minister has recently told that expansive monetary policy of the ECB has had negative effects. Hence, there should be a “prudent start to the exit” from the stimulus.

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