Draghi maintains inflation optimism, dismisses recent growth slowdown

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26 October 2018

thomasdodds

The Euro sold-off to a more than two month low on Thursday, despite President Mario Draghi largely sticking to the script and not dramatically altering his tune on the Eurozone economy following the European Central Bank’s October meeting.

D
espite recent stubbornly low levels of core inflation, which have continued to miss expectations and print well short of target, policymakers remained relatively optimistic over the inflation outlook. The bank’s statement noted that while underlying inflation was generally muted, it reiterated the line that domestic cost pressure was strengthening. Draghi also stated that the rate-setting committee had ‘no sense’ that they should ‘doubt inflation converging to [the] ECB’s aim’.

As anticipated, the ECB remains committed to ending its quantitative easing programme at the end of the year, with Draghi stating that there was no conversation during the meeting regarding an extension to the APP. Draghi also appeared relatively unconcerned by the recent bout of soft activity data out of the Euro-area economy. Recent growth softness was largely dismissed as a sign of ‘weaker momentum’ rather than a sustained downturn. Draghi also attributed the weak data to idiosyncratic factors and was deemed by the Governing Council as not significant enough to change the bank’s baseline scenario.

Yesterday’s assessment from the ECB suggests that the bank remains fully confident of an inflation pickup in the Euro-area and remains intent on raising interest rates in 2019, should this pickup materialise as it expects. It is worth emphasising that returning core inflation back to the bank’s ‘close to, but below 2%’ target is the sole primary mandate of the ECB. Until it sees hard evidence of an upward trend in this measure, it is unlikely to begin discussions on either the timing or pace of future rate hikes.

Sterling slides on Brexit woes, US GDP data out this afternoon

Sterling fell further on Thursday, shedding another half a percent of its value against the US Dollar amid ongoing concerns over Brexit. A Bloomberg report on Friday morning claimed that Brexit talks were on hold amid a lack of clarity on how to proceed within Theresa May’s government. Fears of a ‘no deal’ Brexit continue to drag the Pound lower and until we get more optimistic news regarding progress towards an agreement, we think that any gains the currency manages to eke out will likely prove temporary.

Meanwhile, the Dollar received additional support from yesterday’s solid US durable goods orders data, which surprised consensus. Next up will be this afternoon’s third quarter GDP data, which is expected to show that the US economy continues to power ahead in the three months to September.