Draghi as Committed as a Central Banker Gets, as Economists Await ECB Stimulus
Mario Draghi has left little room for doubt.
Ninety percent of economists in the Bloomberg Monthly Survey predict the European Central Bank president will ease monetary policy in June after saying on May 8 that officials are “comfortable” with acting then. While that allows investors to prepare for added stimulus and a weaker euro, it also sets them up for a bigger disappointment should he fail to deliver.
Almost a year after Draghi pledged to support the euro-area recovery with low interest rates, the central bank is faced with mediocre economic growth and inflation at less than half its goal. ECB Executive Board member Yves Mersch said today that the odds of June action, which could include unconventional measures, have risen “significantly.”
“Draghi clearly pre-committed,” said Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands. “As any other central banker should know, he would risk his reputation, and a significant strengthening of the euro, if the ECB doesn’t follow through in June.”
In the Bloomberg survey, 47 of the 52 respondents said the ECB will ease policy when the Governing Council meets on June 5 in Frankfurt. A record 88 percent said Draghi’s guidance on interest rates, made every month since July, has been effective. That’s up from 48 percent in September, when the question was first included in the survey.
More than 60 percent said his comments after the May 8 meeting, when he said policy makers are “dissatisfied” with the inflation outlook and “comfortable with acting next time,” signaled intent.
“The times of ‘never pre-commitment’ on monetary policy actions are over,” said Duncan de Vries, an economist at Nibc Bank NV in The Hague. “The only thing the markets are uncertain about is what measures the ECB will take next month.”
Of the 47 economists who predicted action, 29 forecast a simultaneous cut in the benchmark rate, currently at 0.25 percent, and the deposit rate, which is at zero. That would make the ECB the first major central bank to charge banks for parking excess cash with it overnight. Denmark ended its experiment with negative rates last month.
In a separate survey published last week, the median estimate of 39 economists was for the ECB to cut the benchmark rate by 10 basis points to 0.15 percent. ECB Chief Economist Peter Praet will recommend a cut of that magnitude and a deposit rate of minus 0.1 percent, Der Spiegel reported yesterday without citing anyone.
“The probability that the Governing Council will act already at its next meeting in June has risen significantly,” Mersch said in Munich today. Policies include “unconventional measures as well as conventional monetary policy instruments to effectively curtail the risks of low inflation over a long period of time,” he said.
Twelve percent of economists in the monthly survey predict Draghi will suspend the absorption of liquidity created by crisis-era bond purchases, which would add about 170 billion euros ($233 billion) to the financial system. Just 8 percent foresee an extension of long-term loans to banks, and the same number expect an asset-purchase program.
Draghi said last month that any worsening of the medium-term inflation outlook would warrant broad-based asset purchases. That option is complicated by the euro area’s 18 separate sovereign-debt markets and the relatively small size of its asset-backed securities market. Bruegel, a Brussels-based economic research institute, has suggested the ECB buy bonds issued by the region’s two bailout funds.
The central bank may consider a package of tools, Governing Council member Ewald Nowotny said on May 12. Mersch said on May 15 that the ECB is accelerating its work on a wide array of measures.
“We are working on a broader range of instruments that might even strike the most fertile imagination” of journalists or analysts, Mersch told reporters in Krakow, Poland. “You will get a very precise answer after the next decision-making meeting” on what those tools are, he said.
Draghi said policy makers won’t decide on any action until after they’ve seen staff macroeconomic projections, which will be released after the June 5 meeting. Governing Council member Jens Weidmann said last week he hasn’t yet agreed to any new policies.
Most economists in the survey said the outlook for the region will remain largely unchanged over the next four weeks, with 2 of 42 responses predicting a deterioration and 14 seeing an improvement.
Even so, data last week showed gross domestic product grew just 0.2 percent in the three months through March, half the rate forecast by economists in a separate Bloomberg survey. The French economy, the currency bloc’s second-largest, unexpectedly stalled and GDP in Italy and the Netherlands shrank.
Inflation has been below 1 percent since October, compared with the ECB’s goal of just under 2 percent. Policy makers have cited the strong euro as one reason for subdued consumer prices. The currency has risen more than 7 percent against the dollar since early July.
Weidmann, who also heads Germany’s Bundesbank, said today that officials are watching the level of the euro, though he warned against setting a specific target.
“The exchange rate, like other economic variables, is relevant for the monetary policy of the eurosystem,” he said in Frankfurt. “A targeted weakening of the local currency could always trigger counter-reactions by other currency blocs. That would be a worse result for all countries involved.”
More than three-quarters of economists said the ECB would act to prevent further strengthening of the euro, giving a median estimate of $1.40 as the upper acceptable limit. The single currency climbed as high as $1.3993 as Draghi spoke on May 8 and traded at $1.3721 at 4:13 p.m. Frankfurt time today.
Policy makers “have in mind the effective exchange rate, not a specific cross,” said Bruno Cavalier, an economist at Oddo Securities in Paris, referring to the euro’s value against a basket of currencies. “But $1.40 looks like a pain threshold already.”