Ethenea: Statement prior to tomorrow’s ECB meeting
Ethenea: Statement prior to tomorrow’s ECB meeting
By Frank Borchers, Senior Portfolio Manager at ETHENEA
In May, inflation in the eurozone weakened more significantly than expected. Following the sharp rise in the headline inflation rate to 1.7% in April, it has now fallen to 1.2% year-on-year. Although energy prices have risen markedly compared to the previous month, a negative base effect is now depressing energy inflation
Core inflation fell from 1.3% to 0.8% year-on-year. This decline is mainly due to the normalisation of the service component after the upward correction in April, as a result of the late Easter period. This means that inflation is moving further away from the ECB's target, which is close to 2 per cent. Growth prospects have also become more uncertain due to the escalating trade dispute and the unresolved Brexit issue. In our view, this increases the risk that the ECB could again adjust its interest rate guidance. In addition, we expect the ECB to announce the details of the TLTRO III (Targeted Longer-Term Refinancing Operations) pricing, which will be available from September 2019. TLTROs have been provided by the ECB since 2014 to provide banks with cost-effective financing. With regard to the future direction of the ECB's monetary policy, we view setting the interest rate as central.