Fitch Ratings-London-12 December 2018: Fitch Ratings' latest Chart of the Month highlights how the ECB's forecasts of rising core inflation have repeatedly failed to materialise over the last few years, which will instil extra caution over the pace at which monetary accommodation is removed.
Despite strong above-trend growth and rising input costs, core inflation (overall excluding energy and food) has remained stuck firmly around the 1% mark, well below the ECB's inflation target. While recent weak economic data have been depressed by temporary factors affecting the car industry, we see an underlying slowdown in growth in train, partly reflecting a deceleration in world trade growth.
This softer, back-to-trend, growth outlook will have implications for underlying inflation. Although wages have picked up noticeably in recent quarters it appears that increased uncertainty (including from Italy, trade war fears or a disruptive no-deal Brexit, among others) is affecting businesses' ability and willingness to pass on higher unit labour costs to prices. It appears that companies are choosing to absorb these costs via reduced profit margins, a possibility suggested by ECB President Draghi in mid-November.
While the weaker outlook for growth and inflation is very unlikely to prevent the ECB from ending QE in December, its termination at a time of growing uncertainty may necessitate a lower-for-longer accommodative monetary policy stance, in order to lift inflation towards target. As a result we now expect the ECB to hike interest rates in 2020 and not by late 2019 as currently communicated in the banks' forward guidance. We expect the ECB to change its forward guidance on interest rates in the next few months.
Notes for Editors: Fitch's Economics team, led by Chief Economist Brian Coulton, analyses global macroeconomic trends and their impact on credit markets around the world. The team publishes global macroeconomic research, forecasts and commentary focusing on 20 major advanced and emerging economies. The Global Economic Outlook, the flagship publication of Fitch's Economics team, and other global economic research and commentary are available at www.fitchratings.com/site/economics.
