New inflation data pushes US Fed and ECB to re-asses their positions

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Core inflation in the eurozone remained subdued at 1.2% in June, well below the headline European Central Bank (ECB) target of 2%. US inflation is near 1.7%, with the latest data confirming the US Federal Reserve is on track for an interest rate cut in July.

Core Inflation is defined as price changes that take out of the balance commodities with a volatile price fluctuation such as energy and food.

The inflation rate in the eurozone justifies maintaining an active monetary policy, according to Francois Villeroy de Galhau, one of the frontrunners to succeed Mario Draghi as president of the ECB.

Addressing a conference in Germany on 28 June, the current Governor of the Bank of France predicted that interest rates would not rise this or the coming year, reiterating the board’s commitment to buying more sovereign bonds.

Another hopeful to succeed Draghi, the Governor of the Bank of Finland Olli Rehn, has called for a review of the 2% policy objective, to take into account Europe’s ageing population and climate change. The ECB rates are already in negative territory and it is clear that monetary policy remains “unorthodox” more than a decade after the global financial crisis began in August 2008.

In July, the US Fed is projected to cut interest rates from 2.5% to 2.25% in a move that reflects declining business confidence and a slowdown in the economy. The European economy is in “crisis mode” as business confidence has been hurt amid the Sino-American trade war and rising expectations of a disorderly Brexit this autumn.


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