Eurozone inflation surprisingly slowed last month, official data indicated Thursday, suggesting the European Central Bank will find it difficult to exit from its $3 trillion quantitative easing program as the broader economy weakens.
Consumer prices around the single currency area expanded at an annual 1.2% clip in April, Eurostat said, down from a final reading of 1.3% in the previous month and well below the ECB's 'just below 2%' target. So-called core inflation, which strips out volatile prices for food, energy, alcohol and tobacco prices, slowed to 0.7%, the lowest level of the year.
"Ending QE in September will be an incredibly hard sell for the hawks on the Governing Council," said ING's senior Eurozone economist Bert Colijn. "With just the May inflation data to go before the June meeting and core inflation well below 1%, anything but an extension to the QE programme would be a surprise at this point."
After the latest reading, not even a magnifying glass will reveal any uptrend in Euro-area core inflation. The #ECB will need to bite the bullet and continue buying bonds even longer. pic.twitter.com/yh0P9R1bYQ— Jan von Gerich (@JanVonGerich) May 3, 2018
The euro was marked 0.22% lower at 1.1960 immediately following the release, extending its two-week decline to 3.5%, before paring that decline to 1.1976 as investors reduce bets that ECB President Mario Draghi and his colleagues on the Bank's Governing Council, the group that sets interest rate policy for the region, will rush to exit their strategy of record low borrowing costs and €2.55 trillion ($3 trillion) in government, agency and corporate bond purchases.
ECB President Mario Draghi told markets last week that, in fact, that while underlying inflation is "expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth", he also cautioned that they remain "subdued and have yet to show convincing signs of a sustained upward trend."
The moves also helped support the U.S. dollar, which rose to a fresh 2018 high of 92.602 against a basket of six global currencies in European trading, following last night's hawkish signalling from the U.S. Federal Reserve and the market's assumption of three more rate hikes between now and the end of the year.
"The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong," The Fed's Open Markets Committee said. "Inflation on a 12-month basis is expected to run near the Committee's symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced."
The Fed's stance marks the emerging contrast between its hawkish tone and the suddenly neutral, although not quite dovish, tact now being deployed by central banks around the world.
Both the ECB and the Bank of England have either walked back, or had market expectations do it for them, from previous signals that suggested both wish to either raise rates (as was the case for the BoE) or pull back on bond purchases (as was the case for the ECB).
In fact, HSBC changed its view on BoE rates earlier this week, suggesting no further moves from the central bank this year and downward revisions to UK GDP in the months ahead.
The pound, which traded at a post-Brexit vote high of 1.44 in mid-April, has fallen some 5.5% to an early January low of 1.3582 in the wake of softer-than-expected readings for inflation, growth and private sector activity in Europe's second-largest economy over the past three weeks.