By Abdulselam Durdak
Frankfurt letter, week beginning Jan. 9

- Rising inflation could leave ECB in dilemma

Euro area annual inflation is expected to be 1.1 percent for December 2016, up from 0.6 percent in November, according to flash estimate data from Eurostat, the statistical office of the European Union. This represents the highest annual inflation level since September 2013.

Although inflation exceeded expectations of a one per cent rise, headline inflation was less than the European Central Bank’s (ECB) target of inflation ‘below, but close to 2 percent’. On the other hand, core inflation, that is excluding energy, food, alcohol and tobacco, rose marginally from 0.8 percent to 0.9 percent.

However, after the release of the data, the question arises as to whether the inflation data will ease the ECB’s hand or if it will leave the bank more in a dilemma between investors who are disturbed by the low interest rate policy and the ECB's current approach?

Major newspapers and economists began to debate these questions, particularly in Germany, the locomotive country of Europe. Critics in Germany have long objected to the bank's low interest rate policy including politicians.

Some politicians in Germany were quick to use higher inflation, which in Germany is now 1.7 percent, to ramp up pressure on the ECB to abandon the low interest rate policy.

Speaking to the Financial Times, Wolfgang Steiger, general secretary of the economic council of Chancellor Angela Merkel’s CDU party, said, “The alleged spectra of deflation can no longer serve as justification for monetary policy’s doping effects on the Eurozone economy.”

Alexander Radwan, a member of the CDU’s sister party, the CSU, also said, “The exit from the zero-interest rate policy is difficult and lengthy . . . That is why we must begin now.”

Last year, German politicians criticized the ECB's extremely low interest rates. However, ECB President Mario Draghi insisted on the necessity of the bank’s policy despite such criticism.

The bank will announce interest rates at the press conference following the meeting to be held in Frankfurt on the 19th of this month.

After last month's decisions taken by the bank, a new decision is not expected nor is a decision to lower interest rates expected to be announced this month. However, in a question and answer section at the meeting, Draghi is expected to respond to criticism from German politicians and economists.

09 Jan,2017