Draghi Efforts Thwarted by Oil as Economists See More Easing

Draghi Dilemma: Will the ECB Have to Do More?
  • Some 61% of respondents in Bloomberg survey see more stimulus
  • Raising monthly QE amount, deposit-rate cut seen among options

Mario Draghi may have to up the ante, and he has oil to blame.

More than 60 percent of economists surveyed by Bloomberg predict the European Central Bank president will announce more stimulus this year, up from 40 percent in December, after a renewed oil-price slump depressed the outlook for euro-area inflation. Fifty-seven percent of those say Draghi will expand monthly bond-buying from the current 60 billion euros ($66 billion), while 53 percent forecast another cut to the deposit rate.

Since the ECB started quantitative easing 10 months ago, prices have barely risen and the timeframe for returning inflation to the central bank’s goal of just under 2 percent has twice been extended. The Governing Council will meet on Thursday in Frankfurt after already showing itself to be divided on the right policy approach, raising the pressure on Draghi to convince his watchers that he can still deliver on his mandate.

“If oil prices remain at the current depressed levels, the ECB will probably not just sit, wait and hope for the best,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “We could see more easing as early as in March.”

The ECB will publish updated inflation and growth forecasts at its March meeting, where any downgrades could provide the justification for more action. Economists in a separate surveypredict the central bank will keep all interest rates unchanged this week.

On Dec. 3, Draghi cut the deposit rate to minus 0.3 percent, extended asset purchases to at least March 2017 and pledged to re-invest the principal of maturing bonds to prevent low price growth from becoming entrenched. The package, which he labeled “adequate” to lift inflation, fell short of investors’ expectations, pushing up the euro and sparking a rout in equities and a rally in bonds.

A drop of almost 40 percent in the price of crude since then, to a 12-year low under $28 a barrel on Monday, has cast a shadow over the ECB’s most recent forecast of inflation accelerating to an average of 1 percent this year and 1.6 percent in 2017. Banks such as BNP Paribas SA and Bank of America Merrill Lynch project consumer prices will rise by just 0.5 percent in 2016.  

Euro-area inflation stood at 0.2 percent in December, lower than anticipated. Analysts forecast the rate to turn negative in the coming months before picking up in the second half of the year.

“The ECB must react to this in order to maintain credibility on its ‘inflation is not rising fast enough’ argument that was behind the December” decision, said Rasmus Gudum-Sessingoe, senior economist at Svenska Handelsbanken in Copenhagen. “The obstacles that we see to action being taken in March include whether the ECB is able to find common ground within the Governing Council.”

In the Bloomberg survey, 45 percent of those economists foreseeing more stimulus say it will be announced at the March 10 policy meeting, with 45 percent predicting the central bank will act by June. The remaining 10 percent see action in September.

An expansion of monthly asset purchases and a deeper cut to the deposit rate were already discussed in December, according to an account of the meeting published last week. At the time, some officials argued that they saw no case for action, with a few speaking in favor of focusing on the rate the ECB applies to excess reserves.

“The risk balance has deteriorated compared to early December,” said Anna Maria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan. “If downside risks are confirmed, the ECB may try to steer expectations toward a deposit-rate cut which should not encounter major opposition within the council.”

Even as he struggles to return inflation to the euro area, Draghi continues to retain economists’ confidence. More than 80 percent of respondents said the ECB president will bring price growth back to just under 2 percent before the end of his term in October 2019. Almost 90 percent of economists see the ECB starting to raise interest rates before Draghi leaves office.

That is, if oil doesn’t continue to thwart his efforts.

“At this juncture it is really all about the inflation outlook,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “It is hard to see a sudden rise in inflation unless oil prices pick up dramatically, though that looks unlikely anytime soon.”

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