25/07/2011
By Ilonka Oudenampsen
Inflation in the Eurozone will be well above 2% in five years’ time, according to 36% of 52 large European institutional investors surveyed by ING Investment Management (ING IM).
Current unconventional measures being used by the European Central Bank, such as unlimited liquidity and the purchase of peripheral bonds, will ultimately lead to higher inflation, 23 (44%) of the respondents warned. Only 13.5% felt that these measures will not lead to higher inflation.
The ‘tails’ of the inflation outlook were fatter on the upside than on the downside with 8% expecting inflation to be persistently above 4% over the next 5 years, while only 2% saw deflation getting entrenched over this period.
According to the survey, a core driver of the upward bias in inflation expectations seems to be the erosion of credibility of the ECB. Only 23% said that they had a high estimation of the central bank’s ability to realise low and stable inflation in the medium term.
Rising commodity prices were also a fear. Commodity prices are expected to contribute to a broad inflation problem, according to 40% of respondents, while 21% saw limited or no risk of this occurring.
In terms of where there is significant inflation risk around the world, 42% of the respondents highlighted emerging markets, followed by 28% who selected the US and 22% who believed Europe is exposed here. Only 8% said there were significant inflation risks in the UK.
Valentijn van Nieuwenhuijzen, head of strategy at the strategy and asset allocation group at ING IM, said: “In the long term, we expect divergent inflation developments. The risks in emerging markets have abated somewhat, but this could change if these economies reaccelerate again. In general, these countries have only limited spare capacity and could therefore see broader inflationary pressures towards the end of the year.
“In Europe, peripheral inflation might fall, but there is a chance German inflation will start to rise toward the end of the year as the unemployment rate is already below the pre-crisis low. This could lead to inflationary pressure elsewhere in Europe, which could lead to the ECB raising rates.
“We also expect the Bank of England to react to continuing above target inflation at some point by raising rates. However, the tightening process is unlikely to start before the first half of 2012.”
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