Rising growth, increasing inflation and lower unemployment are building a groundswell for the European Central Bank to tighten the euro. Last month the ECB said it will cut quantitative easing from €60 billion per month to €30 billion, beginning in January, and wind down to nil by September 2018. While the Bank’s President Mario Draghi says the end of bond-buying does not foretell imminent policy tightening: we don’t believe him.
Signals published this week are bullish for the Eurozone. Purchasing-manager-indices have accelerated since mid-2016. The European Union’s Autumn Economic Forecasts say the economy will grow 2.2% in 2017 and 2.1% in 2018, adding that it is "on track to grow at its fastest pace in a decade this year." Falling unemployment has fuelled a privately-led consumption recovery. Years of austerity has created pent up domestic demand, which now is unwinding. Headline inflation in the Eurozone fell marginally in October from 1.5% to 1.4%. Yet core inflation came in higher than expected, rising to 1.1% from 0.9%.
By Peter Rosenstreich