Eurozone inflation fall dampens prospect of European Central Bank quantitative easing taper

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Mario Draghi's comments disturbed Eurozone bond markets this week (Source: Getty)

Inflation in the Eurozone fell in June, dampening market expectations of tighter monetary policy from the European Central Bank (ECB).

Early estimates of inflation from the European Commission showed consumer prices rose by only 1.3 per cent in June, down from 1.4 per cent in May.

The euro fell by 0.27 per cent against the US dollar in Friday trading to reach $1.14, retracing some of the gains of the last week. It started the week below $1.12.

Read more: Draghi defends easy monetary policy

The fall in inflation was driven by the waning influence of energy price increases (of which oil is a major component), which slowed from 4.5 per cent in June to only 1.9 per cent in June.

Core inflation, which strips out the effects of volatile energy, food and drink prices, rose to 1.1 per cent. While this was an increase from the 0.9 per cent recorded in the previous month, it was still well below the two per cent ECB target.

ECB president Mario Draghi was one of multiple central bank governors to roil bond and currency markets this week when investors interpreted comments as a sign quantitative easing asset purchases will be gradually wound down, or tapered.

The €60bn (£53bn) bond purchases are set to continue until the end of the year, with no decision yet taken on the future of the programme. The ECB's rate-setters meet on 20 July, when an announcement could be made, although some economists expect the move to be put off until the September meeting.

Draghi this week said “reflationary” forces had replaced deflation, raising hopes the ECB would act to tighten monetary policy to stop inflation accelerating.

Since the start of the week the German 10-year Bund yield, the risk-free rate for Europe, has risen from lows of 0.23 per cent to highs of 0.473 in trading today, before retreating to 0.442 per cent at the time of writing.

However, Draghi and other ECB bankers said markets had overreacted, prompting an abrupt retreat in the euro. Today’s figures provide further reason for the doves on the ECB’s rate-setting governing council to continue with supportive monetary policy.

The ECB, Draghi among them, has consistently said inflation must rise sustainably towards its two per cent target.

The third consecutive fall in inflation in a row means ECB taper talk may be overdone, according to Bert Colijn, a senior economist at ING Wholesale Banking.

He said: “The overall trend remains weak on lower oil prices, which means that a normalisation of ECB policy does not seem to be around the corner.

“With some evidence of price pressures building, we are expecting further cautious improvements in core inflation. Just not the kind that ECB hawks would like to see though as we do not expect core inflation to reach 1.5 per cent this year.”

Read more: Euro builds on 2017 high on Mario Draghi's ECB taper talk

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