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Draghi maintains cautious stance

The European Central Bank (ECB) left its key benchmark interest rate unchanged today, as we expected

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The European Central Bank (ECB) left its key benchmark interest rate unchanged today, as we expected. In response, the single currency initially weakened against both Sterling and the greenback before recovering.

Inflation, currently at 1.3 per cent in the Eurozone, remains stubbornly below the ECB’s target of approximately 2 per cent. We should see prices tick higher though due to the recent rise in oil prices and the fall in the Euro against both the Pound and the US Dollar.

There are constraints on how high inflation could rise though. Unlike the UK and US, the Euro area labour market has plenty of spare capacity. Unemployment in Europe is 8.5 per cent compared to 4.2 per cent in the UK and 4.1 per cent in the US, and when unemployment is high, it is harder for workers to demand bigger salaries.

Rising real wages will boost consumer spending and in turn accelerate inflation, but Germany is the only country where this is occurring. The recent political uncertainty in Italy has served to prevent structural changes in the labour market, while President Emmanuel Macron’s recent reforms in France have only triggered protests.

We anticipate more of the same from Draghi in the months ahead. Until employment and inflation start to show a sustained push higher then monetary policy is likely to remain accommodative.

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