Euro area inflation likely rose to 1.8 pct in April, ECB’s exit from current loose monetary policy to be gradual

As widely expected, the European Central Bank kept its monetary policy on hold on Thursday. Moreover, the central bank’s forward guidance “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases” was the same. The risk outlook for economic growth was witnessed to have become more balanced; however, it is still skewed to the downside. ECB governor Draghi kept the inflation outlook unchanged.

Draghi continued to highlight inflation’s role in the central bank’s decision making and clearly wanted to distinguish the improved growth outlook from the continuously subdued core inflation. This clearly exerts a lot of stress on core inflation developments when considering the monetary policy’s future path, noted Nordea Bank in a research report.

The inflation figures for Spain and Germany returned to higher level in April following the downside surprise in the prior month. Inflation in Germany accelerated to 2 percent year-on-year, whereas in Spain it accelerated to 2.6 percent year-on-year from 2.1 percent. According to Nordea Bank, the inflation figure for the whole of euro area is likely to have come in at 1.8 percent, whereas the core figure is expected to have come in at 0.9 percent.

The rebound in euro area’s economic outlook is expected to push the Governing Council to assess risks to be valanced in June when the new macroeconomic projections are released. Moreover, the forward guidance is expected to be altered so that “lower rates” are excluded, added Nordea Bank. But persistent subdued core inflation signifies that the exit from the currently very loose monetary policy would be quite gradual.