Draghi Vow to Act Splits Economists as Growth Picks Up
Mario Draghi’s signal that he may act to counter low inflation as soon as next month is dividing economists as the euro-area recovery shows signs of firming.
Nineteen out of 38 responses in the Bloomberg Monthly Survey of economists showed the European Central Bank president will ease monetary policy when officials hold their monthly rate-setting meeting in March, with the same number indicating he’ll stay on hold. While euro-area inflation matched a four-year low in January, the currency bloc’s economy grew faster than expected at the end of last year, according to data released on Feb. 14.
Draghi is trying to support the regional revival against the backdrop of subdued price pressures that threaten to undermine economic activity. Even so, he kept rates unchanged at a record low on Feb. 6 as he cited the “complex picture” of the economy and the “need to get more information” before deciding whether to take action.
“The ECB is probably happy to remain sitting on its hands,” said Duncan de Vries, an economist at Nibc Bank NV in The Hague. “The inflation rate is obviously low and is not expected to change significantly in the coming months, but policy makers are expected to look through short-term inflation developments against the background of slightly improving economic growth momentum.”
Euro-area gross domestic product expanded 0.3 percent in the last three months of 2013, beating a median estimate of 0.2 percent by economists in a separate Bloomberg survey and improving on 0.1 percent in the previous quarter.
Germany and France, the region’s biggest economies, both had faster growth than predicted. Italy, the third-largest, posted an expansion for the first time in more than two years. Dutch GDP climbed more than twice as much as estimated and Portugal’s economy grew for a third quarter.
The euro climbed for a third day today, rising 0.1 percent to $1.3701 at 1:14 p.m. Frankfurt time. European stocks rose for a second day, with the Stoxx Europe 600 Index gaining 0.4 percent to 334.72.
The recovery hasn’t yet pushed inflation back to the ECB’s goal of just under 2 percent. Price growth in the 18-nation euro area slowed to 0.7 percent last month, matching the level in October that helped prompt an unexpected November rate cut.
The European Union’s statistics office in Luxembourg releases this month’s preliminary consumer price index on Feb. 28. The ECB will publish updated projections on March 6 for inflation, for the first time extending the forecasting horizon to 2016.
Draghi has “very much kept the door open to future action -- and as soon as March,” said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. “If the ECB staff forecasts show euro-zone consumer price inflation still clearly below 2 percent in 2016, the Governing Council may very well feel that this is the trigger to enact further stimulus.”
Among the economists who predicted action by the ECB at its March 6 meeting, the most probable decisions were seen as a cut in the benchmark rate or an end to the sterilization of crisis-era bond purchases. The ECB’s key rate is at 0.25 percent, leaving little room for further reductions.
Less-likely policies were seen as a new offer of long-term loans to banks, a negative deposit rate, a reduction in the reserve requirement, changes to the collateral framework for banks, or asset purchases by the ECB.
Draghi introduced forward guidance in July 2013, saying official rates will stay at or below current levels for an extended period. He stepped up the pledge in January, saying the central bank “strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary.”
More than 80 percent of economists in the Bloomberg survey said they find Draghi’s forward guidance effective, up from 77 percent in January and less then 50 percent in September when the question was first asked.
At the same time, almost 60 percent said the ECB will look past a drop in the headline inflation number if core inflation, which excludes food and energy, holds steady or rises. Draghi said on Feb. 6 that the January slowdown “was mainly due to energy price developments,” while medium-term inflation expectations remained “firmly anchored” and price gains will gradually rise toward the bank’s target.
“Action is in our view dependent on a further decrease of euro-zone inflation,” said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany. “We don’t expect a significant downward revision of the ECB’s staff inflation outlook in March and don’t consider action likely. But of course this is far away from being a safe bet.”