Spain's chances of joining Emu in 1999 increased significantly in 1996, underscored by the sharp decline in the 10-year yield gap with Germany (to 145bp in November from 367bp in January). Lower inflation, a reduced budget deficit and expectations of further improvements in 1997 make it likely that Spain will meet the Maastricht conditions (see graphs).
The outlook for inflation in 1997 is quite good. Headline inflation was running at 3.5% in October 1996, well below the 5.2% registered after the April 1995 turmoil. Several factors are contributing to this fall, including the better international climate. The increased rate of household savings, the Bank of Spain's full autonomy and growing credibility, the lack of demand pressures, the peseta's strength, lower money supply growth and a tighter fiscal policy, are all contributing factors which curb inflation further.
Morever, the decline in some government-administered prices, particularly in energy and telecommunications, and the measures approved by the government in June 1996 partially liberalising professional services, electricity, telecommunications and urban land will also help to reduce inflation. Central Hispano's Research Department believes inflation will dip below 3% in the first months of 1997 and drop to around 2.5%
