Euro-Area Inflation Ticks Up as ECB Prepares Stimulus Exit

(Bloomberg) -- Euro-area inflation accelerated last month, buttressing the arguments of policy makers keen to phase out unprecedented stimulus.

The inflation rate rose to 1.4 percent in March, the highest level since the end of last year. The reading is in line with the median estimate in a Bloomberg survey and up from 1.1 percent in February. The core rate remained unchanged.

More than three years after the European Central Bank cut interest rates below zero and started its asset-purchase program, policy makers are finally confident inflation will return to their goal of below but close to 2 percent. That confidence has fueled a debate over how and when to scale back support, with officials telling investors they're are broadly right in anticipating an end of bond buying by December and the first rate increase in the middle of next year.

Most prominent among the Governing Council's 25 members arguing for bringing quantitative easing to a halt is Jens Weidmann. The president of Germany's Bundesbank reiterated his call last month for ending asset purchases “soon” and labeled expectations for a mid-2019 hike “probably not entirely unrealistic.” Dutch central bank Governor Klaas Knot has adopted a similar stance, saying policy normalization is a “top priority.”

Buttressing Weidmann's stance, inflation in Germany, the bloc's largest economy, jumped in March to the highest level since December, data last week showed. Consumer-price growth accelerated more than forecast in Italy and France, though Spain's uptick fell short of expectations. The timing of Easter may have distorted data last month.

The ECB predicts inflation in the euro area will hover around 1.5 percent for the remainder of the year. According to Commerzbank economist Christoph Weil, officials may be in for a rare upside surprise. He sees the rate exceeding 2 percent in the summer, due to higher energy costs.

Core inflation though will barely budge. The rate, which strips out volatile components such as food and fuel, held at 1 percent in March and is forecast to rise only slowly over the medium term.

Weak underlying price pressures are one reason some policy makers are cautioning against withdrawing stimulus too soon. Unemployment, particularly in southern Europe, is another factor.

While companies in Germany are reporting a labor shortage, in both Italy and Spain, at least one in ten workers is still out of a job.

The unemployment rate for the euro area dipped to a nine-year low of 8.5 percent in February from 8.6 the previous month, a separate Eurostat release showed.

Because of labor-market slack -- which may mute upward pressure on wages and inflation as the supply of workers proves larger than anticipated -- ECB chief economist Peter Praet has argued against rushing policy normalization.

Similarly, Finland's central-bank chief Erkki Liikanen stressed last week that asset purchases are open ended, while Slovakia's Jozef Makuch said that in the absence of convincing signs of a sustained inflation pickup, he sees “no reason for major revisions” to policy yet.

The Governing Council holds its next policy meeting on April 26.

--With assistance from Andre Tartar and Kristian Siedenburg

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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