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ECB remains in wait-and-see mode as inflation picks up

Inflation in the Eurozone reached a two-year high in December, hitting 1.1%. While Draghi said at today’s press conference that “inflation is likely to pick up further in the medium term”, he also stressed the increase has been “largely driven by energy inflation”. Therefore, he said, there was no concern about inflation overshooting its target.

“Draghi’s comments suggest that the ECB is in no rush to adjust monetary policy in the near term, with the central bank currently in observation mode,” said Shilen Shah, bond strategist at Investec Wealth & Investment.

Inflation divergence

At the same time, inflation has been diverging between countries, with year-on-year prices rising 1.7% in Germany and only 0.5% in Italy. In response to a question from a journalist, the Italian admitted he has no instruments in place to tackle this divergence. However, he said it’s “not likely” that these divergences become “unmanageable”, expressing confidence that they would narrow over the medium term. 

As the chart above shows, discrepancies in inflation rates have actually decreased rather than increased over the course of last year, suggesting Draghi has a point saying that the “the ECB’s policy is working”.

“And the current discrepancies will disappear faster if the recovery persists,” said Draghi, adding that “the recovery of the whole of the Eurozone is in the interest of German citizens as well”.

Part of the Bonhill Group.