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March inflation lowers prospects for ECB tapering

by OMFIF and National Bank of Poland analysis

Tue 4 Apr 2017

Dipping March inflation lowers prospects for ECB tapering Enlarge Chart loading Image

In March the euro area’s annual inflation dropped to around 1.7% from 2% in February, but in some member countries the fall was more pronounced. In Spain the rate fell to 2.1% from 3%, while in Germany it dropped to 1.6% after having reached 2.2% in February (the highest since August 2012). Energy and food prices were responsible for the fall, just as previously they had pushed inflation up. Core inflation for the euro area fell to 0.7% from 0.9%, while the market’s ‘5y5y inflation’ expectations fell below 1.6%. After this, the market became less sanguine about the chances of a speedy beginning to ‘tapering’ – adjusting downwards monthly bond purchases.

The volume of asset purchases is close to €1.7tn, with the share of public sector purchases, at €1.4tn, representing more than 82% of the programme. The relaxation of the rules of the public sector purchase programme in December – along with a worldwide increase in yields – led to a fall in the bank holdings’ remaining weighted average maturity. In February, their average maturity fell to 8.2 years, the lowest since June 2016.

The M3 aggregate in March grew at an annual 4.7% (4.8% in February and 5% in January). This slowdown mainly reflected falling net external assets. M1 is still the key generator of this growth. Meanwhile, the M2-M1 aggregate – after dropping in December to its lowest level in more than nine years – reached €3.5tn. The effect of negative rates is widely felt, with longer-term financial liabilities of other euro financial institutions falling below €6.9tn in February for the first time since March 2010. Some of this lost ground was recovered in March.

This analysis was led by Pawel Kowalewski, Economic Adviser in the Bureau of Monetary Policy Strategy at the National Bank of Poland, with contributions from Danae Kyriakopoulou, Head of Research at OMFIF.