Draghi’s Dilemma: Eurozone Inflation Hits 2% With Italy On Bond Life Support

Eurozone headline inflation hit two percent today, and that has the inflation hawks in Germany screaming.

Yet, ECB president Mario Draghi has promised to maintain QE asset purchases, and Italy has no other real buyer for its bonds.

What’s Draghi to do?

Headline Inflation Hits Two Percent

A milestone.

Annual inflation in the eurozone accelerated to hit 2 per cent for the first time since January 2013 last month, underscoring a sharp rise in prices driven by higher energy costs in the single currency area.

February’s year on year inflation reading, which rose from 1.8 percent and was in line with analyst estimates, comes as inflation hit 2.2 per cent in Germany last month and registered over 3 per cent in Spain.

The eurozone’s core inflation measure, however, which strips out volatile energy and food prices, remained unchanged at 0.9 percent and has remained stubbornly below 1 percent since August 2013.

Inflation Dilemma Headache

With rising inflation, ECB hawks set to crank up pressure for a move towards exiting aggressive monetary easing. This poses a Policy Dilemma for Draghi.

Mario Draghi will get a clear message from European Central Bank hawks next week: drop the doom and gloom.

After four years of weak growth and below-target inflation, price pressures have returned more quickly than the bank expected. Eurostat, the European Commission’s statistics bureau, on Thursday reported that prices rose 2 per cent in the year — rising above a central bank target of “below but close to” 2 percent for the first time since January 2013.

The central bank continues to hold interest rates at historically low levels and has promised to buy €780bn worth of bonds this year as part of its landmark quantitative easing program. Both the rate cuts and the QE program have been a long-running source of irritation, notably among the German political and economic establishment. Influential voices in Berlin have seized on higher German inflation — the country’s annual price rises reached 2.2 per cent in February — to call for rate rises.

Mr. Draghi has so far pledged that he would be ready to cut rates even lower and buy more bonds. His promise is that interest rates would “remain at present or lower levels for an extended period of time”.