BofAML _ el 2% de inflación no es una victoria

Redacción - Sabado, 04 de Marzo

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Europe Economic Weekly: 2% is not a victory •  Euro area inflation at 2% is not a victory, in our view. Transient effects are at play. We expect a dovish Draghi next week.•  Appetite for a divisive decisions in June should be limited, too. But after the summer, a proper debate seems unavoidable.•  Meanwhile, PMIs and credit developments are consistent with decent growth dynamics in the Euro area.

We think that the current "truce" between hawks and doves will be reflected in a dovish tone by Draghi, with no decision. Even in June the Governing Council's appetite for another deep and potentially divisive decision on the monetary stance will likely be limited. After the summer though we think that a proper debate will be unavoidable. We review that at length in our ECB preview.

That should be a tricky debate when we get there. Yes, inflation will be higher. But core inflation will likely remain not far from 1% (and may be even lower given renewed weakness, see our weekly view). Can the ECB taper just on the "hope" of reaching 2% down the line given its track record (Chart 1)? The answer is likely no, purely based in economics. But this is now about politics. And we fear that, given the weight of the political constraints, the answer to this question is probably "yes".

For the moment we can take comfort on the data flow, which is still very decent. We are tracking GDP growth at c.2.5% annualized in Q1 and even credit data is showing again positive signs. But when you look at data carefully there are still reasons to be cautious. As we highlight in our weekly view data this week confirms the continuation of a positive credit recovery in the Euro area. However, since the second half of 2016, it has been shaping up to be more of a two-speed recovery: loan dynamics to Euro area households remain steady, while credit origination towards the corporate sector has been less firm.

Also, we insist again on the oil-driven margin squeeze facing corporates. We take another deep look, approaching from a different angle, and highlight that the recent wave of "bad inflation" also raises concerns on the discouraging impact of higher output prices on demand - when the adjustment through margins reaches its limits and the pass - through of higher input prices causes higher output charges.

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