LONDON: The eurozone’s economy could prove to be a shining star again this year, but persistently tepid inflation will probably keep the European Central Bank from following its peers and tightening monetary policy anytime soon.

Reports coming on Tuesday are expected to show 2017 was the bloc’s best year for growth in over a decade, capped off by a strong fourth quarter. Purchasing managers’ indexes released for January already suggest that momentum accelerated into this year.

Such growth rates are fertile ground for tighter policy but a strong euro, up around 4 per cent this year, is exacerbating a battle the ECB is facing in trying to get inflation up anywhere near its 2 per cent target ceiling as it makes imports so much cheaper.

On Thursday, having left policy unchanged, the bloc’s central bank warned the euro’s surge was a potential risk and said it might have to review strategy if US comments on a weak dollar led to a change in monetary conditions.

“The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability,” ECB President Mario Draghi told a news conference.

“Based on today’s data and today’s projection I see very few chances at all that interest rates will be raised this year.” From this month, the ECB has halved the amount of cheap cash it is pumping into the system under its quantitative easing programme to 30 billion euros ($37.3 billion) per month, and currently envisages halting asset purchases in September.

Yet the first hike in interest rates — and then of the currently negative deposit rate — is not predicted to come for at least another year, the Reuters poll found. The refinancing rate probably won’t rise until the latter half of next year.

“We remain confident that there will not be any key policy rate moves this year in light of Draghi’s comments,” said Simon Wells, chief European economist at HSBC.

In contrast, the United States Federal Reserve has already embarked on a tightening cycle and if a Reuters poll is to be believed its change of leadership is unlikely derail it from increasing borrowing costs three times this year.

Economy growth

Its economy is expected to grow 2.6 per cent in 2018, the best performance in three years, fuelled in part by a sugar rush from the biggest tax overhaul since the 1980s. And a weaker greenback should keep inflation elevated.

“With momentum in aggregate demand, tightening labour markets, some evidence of a rebound in inflation, and resilient financial conditions, we expect three hikes in 2018 and one more in 2019,” analysts at Nomura wrote to clients.

“Besides Governor (Jerome) Powell as the new chair, significant turnover in Fed leadership is widely expected, but we do not expect this to cause a material change in the near-term trajectory of monetary policy.” The Fed has its first meeting of the year in the coming week, but with it being Janet Yellen’s last meeting as chair no change is expected.

The Bank of Canada kicked off 2018 by hiking interest rates, buoyed by robust job growth and having raised rates twice back-to-back last year, even as uncertainty around the fate of the North American Free Trade Agreement lingers.

Two more increases will come in 2018, a poll found. Governor Stephen Poloz said last month he is increasingly confident the economy will need less stimulus over time.

“We didn’t walk into this as if it was a no-brainer, that it was time to move rates. There was a good debate around that. It’s not that we were arguing but we were debating the pros and cons... the big cloud over the forecast, as well as our discussion, is NAFTA,” Poloz told a news conference.

Reuters