Daily Insight
Group Economics Macro & Financial Markets Research
Mario to fight QExit talk
Nick Kounis & Aline Schuiling + 31 20 343 5616
3 June 2015 • • •
Jump in eurozone core inflation pushed up government bond yields and the euro We expect the ECB to cool exit talk on Wednesday, but tone could change early in 2016 Eurozone SMEs see rising availability of external finance adding strengthening outlook
Core inflation jumps
ECB to fight QExit talk, but tone could change in 2016
Easing Grexit fears and rising ECB QExit fears pushed up
We think the ECB will be unwavering in its commitment to
government bond yields and the euro on Tuesday. The latter
continue QE this year and will dismiss QExit speculation. We
reflected higher than expected eurozone inflation. It turned
have only just seen signs of a more convincing recovery, while
positive in May, rising to 0.3% yoy (consensus: 0.2%) from 0%
core inflation remains low, despite the rise. In addition, we
in April. The period of negative inflation looks to be behind us,
think the ECB will want to fight against any early tightening of
having lasted only four months. So much for Japan scenarios.
financial conditions due to higher bond yields and a stronger
There was an upward effect from food and energy prices, but
euro, as it could nip the economic recovery in the bud.
the really big story in the report was the rise in underlying
However, early next year, the tone could change. By then we
inflation. Core inflation jumped to 0.9% yoy from 0.6% in April.
would have seen a number of quarters of better economic growth. Core inflation will have shown clearer signs of turning
A blip?
the corner, while inflation expectations will have risen further.
Within the core, both goods and services prices rose. Given
The ECB’s confidence that it will meet its inflation target over
this is a flash estimate, we do not have further details. The
the medium term should be stronger. It will be clearer that
states data in Germany did not provide clear evidence that the
September 2016 is very likely the end point for QE.
rise in the core is an aberration. On the one hand, volatile package holidays had an upward effect, on the other, this was
More bank loans available for eurozone SMEs
cancelled out by falling clothing and shoes prices, which can
The ECB published its bi-annual report Survey of the Access
also have transient effects.
to Finance of Enterprises in the eurozone. It showed that SMEs reported an marked improvement in the availability of
We expect core inflation to rise next year
bank loans. For instance, for small firms the survey balance
Looking more fundamentally, our base case sees core inflation
increased to +9 from +3, while for medium-sized firms it rose to
rising from around the turn of next year. This reflects that we
+23 from +14. This improvement adds to the evidence that the
expect spare capacity to fade and this will put upward pressure
monetary transmission mechanism has started working again,
on service sector inflation. In addition, the fall in the euro
implying that the ECBs expansionary policy is working its way
should feed through into higher goods prices. Crucially, both
through to the real economy. Indeed, SMEs account for 70% of
these effects tend to work with long lags, hence our view that it
all eurozone employment.
will be more of a trend for next year than this year.
SMEs have more access to bank loans Headline inflation will rise in coming months Headline inflation is likely to continue to rise in the coming months. Inflation remains unusually depressed by week food price inflation and sharply declining energy prices. As these
Change in availability of external finance (+ = more available)
30 20 10
components return to more normal rates, headline inflation will
0
likely jump towards the 2% target by early next year. Of course
-10
that would be a relatively transient effect and where it settles
-20
beyond that will depend on the path of the core. Nevertheless,
-30
higher headline inflation is important, as it helps to shape
-40
inflation expectations.
2009
2010
2011
Small firms
2012
2013
Medium-size firms
Source: ECB Access to Finance of Enterprises
2014