FRANKFURT (AFP) — The ECB is holding firm on interest rates while waiting to see if global growth and commodity prices run out of steam, analysts said Wednesday following new insights from central bank policymakers.
"A crucial question is whether commodity inflation is here to stay or not," said Marco Annunziata of UniCredit Markets in a research note.
"If commodity inflation remains at current levels, the monetary policy dilemma becomes much harder."
At Capital Economics, Jennifer McKeown told AFP: "We think that the ECB's attention is going to turn to slowing activity, and probably a lot sooner than markets think."
A member of the European Central Bank's governing council, French central bank head Christian Noyer, told the Wall Street Journal Europe Wednesday that commodity and energy prices could fall if economic activity slumped more than expected.
His remark implied that that might justify an easing of rates.
If an International Monetary Fund forecast for weaker growth was accurate, "then of course the downward pressure on these types of goods might be strong and we may have a totally different path of inflation," Noyer said.
Comments Noyer made a day earlier had been taken to mean that eurozone rates might have to rise to stifle inflation.
His latest remarks provided insight into how the European Central Bank was mulling the possibility that a sharp easing of inflation pressures might already be in the pipeline. The bank prefers to see annual eurozone inflation at just under 2.0 percent.
High oil and food prices pushed inflation to a record 3.6 percent in March for the 15 countries that share the euro.
That led analysts to conclude the main ECB interest rate would stay on hold at 4.0 percent even though the US Federal Reserve and the Bank of England have cut their own rates to ward off an economic slump.
The Bank of England said that although inflation was high in the short term, it worried about the risk of unduly low inflation later on.
The difference in interest rates has pushed the dollar lower against the euro, which set a new record above 1.60 dollars on Tuesday.
But economic data released on Wednesday showed that eurozone manufacturing activity was weak in April, and Global Insight economist Howard Archer said the NTC Research survey of business leaders indicated "overall activity was essentially only stable at recent significantly lower levels."
McKeown at Capital Economics added: "In all, while Germany's resilience is encouraging, economic activity in the eurozone as a whole has clearly continued to slow."
As a result, Sylvain Broyer at the Natixis brokerage said: "Should the oil price fall by 20 percent in the third quarter as we still expect," it could trim eurozone inflation by a full percentage point.
That view was at odds with comments by Yves Mersch, head of Luxembourg's central bank and another ECB governor.
Mersch told the Financial Times Deutschland Tuesday that a changing global economy was possibly leading to a decoupling of growth from inflation.
"That would have possible consequences for monetary policy options," he said.
Gilles Moec at Bank of America told AFP that comments by Noyer at the Bank of France nonetheless showed "he is genuinely worried about growth in the eurozone.
"The second and third quarters could really be on the weak side," Moec said.
In remarks on the most recent Bank of England vote to lower interest rates, Jonathan Loynes of Capital Economics noted that some policymakers in Britain were "prepared to think more about the implications of the weakening activity outlook for inflation further ahead."
Central banks typically expect monetary policy decisions to have their full effect about 12 to 18 months after they are announced.
But developments such as recent German wage raises could push eurozone inflation upwards in the coming months, and the bottom line, said Holger Schmieding at Bank of America, was that "many at the ECB are very concerned about their inflation-fighting credentials."
A rate cut, therefore, appeared unlikely until consumer prices come off the boil or growth takes a sudden turn for the worse.
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