ECB sees inflation back by year-end

May 18, 2015

Mersch, Member of the Executive Board of the European Central Bank presents an oversized newly unveiled 10 euro note at the headquarters of the European Central Bank (ECB) in Frankfurt

An interesting weekend intervention by ECB policymaker Yves Mersch who said there was no question of winding up QE early and that inflation, still skulking around zero, would stay there until autumn then rise sharply late in the year towards 1.5 percent.

The vanishing threat of deflation is one of the factors that has pushed the bond market into turmoil in recent weeks. Oil has now bounced by more than $20 from its low and by the end of the year the deflationary impact of its dramatic fall in the second half of last year will have dropped out of the equation.

Even assuming it climbs no further  – staying somewhere between $65-70 – by year-end the annual comparison will be with an end-2014 price of around $55 so the base effects will be pushing inflation up for the first time in well over a year.
Mersch, Chicago Fed President Charles Evans and Swedish central bank Governor Stefan Ingves speak at a seminar in Stockholm on Monday.

No sign of a breakthrough in Greek bailout talks over the weekend. Prime Minister Alexis Tsipras said his government would not back down from its red lines in negotiations with its lenders but said a deal must be reached soon.

Tsipras said the two sides had largely agreed on fiscal targets and VAT rates, but disagreed on labour issues and pension reform. He said an accord should include low primary budget surplus targets for 2015-16 and a debt restructuring.

Athens owes around 1.5 billion euros to the IMF in various instalments through June. That looks very tough to meet. Finance Minister Yanis Varoufakis speaks at length on a late night talk show on Monday.

Britain’s new Conservative government looks fortunate in the opponents it faces. The leader of Britain’s anti-EU UKIP party, Nigel Farage, should take a break, the party’s only MP said on Saturday. Douglas Carswell insisted he had no designs on the leadership but it will fuel the party’s power struggle started when Farage overturned his decision to resign.

Labour has already lost what some say is their best leadership candidate, Chuka Umunna, and over the weekend Jim Murphy, the party’s leader in Scotland, resigned.

He said he wanted his successor elected via one-member-one-vote, cutting the trade unions out of the process. It was the unions that secured the national party leadership for Ed Miliband in 2010. His brother David had more support among MPs and party members.

Andy Burnham, favourite to replace Miliband and the unions’ favourite, said the party’s main two priorities were to rebuild its economic credibility and demonstrate it is pro-business. He also abandoned Labour’s opposition to an EU referendum and said it should take place next year rather than in 2017.

Finance minister George Osborne announced a post-election budget in July. If he sticks to plans for eye-watering public spending cuts, that could be the point at which the government begins to lose touch with the centre of public opinion.

U.S. special forces carried out a raid inside Syria, killing a senior Islamic State leader who directed the group’s oil, gas and financial operations. His wife was captured. Syrian state TV said the Syrian army killed five IS leaders in the east of the country – a Saudi, a Turk, a Chechen, a Jordanian and an Iraqi.

It’s a different story for IS in Iraq where its forces said they had taken full control of the western Iraqi city of Ramadi on Sunday in the biggest defeat for the Baghdad government since last summer.

Ramadi is the capital of Iraq’s western Anbar province, which is dominated by Sunni Muslims. Prime Minister Haider al-Abadi signed off on the deployment of Shi’ite militias to attempt to seize back the area, a move he previously resisted for fear of a sectarian backlash.

An Egyptian court sought the death penalty for former president Mohamed Mursi. Mursi and his fellow defendants were convicted for killing and kidnapping policemen and breaking out of jail during the 2011 uprising against Hosni Mubarak.

The court is expected to make a final ruling on June 2 and refer it to Egypt’s top religious authority before any executions can take place. International condemnation was most sharply expressed by Turkey’s Tayyip Erdogan who said Egypt was turning back to “old Egypt” and the West was sitting watching in hypocritical silence. Washington said it was “deeply concerned”.

EU foreign and defence ministers meet to discuss action to stop or limit illegal migration – including quotas for distributing 20,000 resettled refugees and a plan to destroy smugglers’ boats.

The EU/U.S. trade deal could have life in it yet. Senate Republican leader Mitch McConnell said on Sunday that the Senate will pass “fast-track” authority to negotiate major trade deals this week.

A fast-track bill would clear the way for a 12-nation Pacific trade agreement. Without it, the EU deal will run into the sand as Obama’s presidency ends in 18 months and no one will want to negotiate hard not knowing what his successor intends.

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