Draghi Seen Holding Nerve on Economy as ECB Enacts Stimulus Plan
Mario Draghi probably doesn’t need to cut his holiday short.
Economists from Morgan Stanley to JP Morgan Chase & Co. say the European Central Bank president will avoid announcing new measures for now, even after euro-area growth stalled last quarter. Instead, officials will trust existing policies to stem mounting risks such as slowing inflation and escalating sanctions against Russia.
“There can be no mistaking the euro-area recovery being at a critical juncture at present,” said Elga Bartsch, chief European economist at Morgan Stanley in London. “Despite these risks, we don’t think that additional ECB action is imminent.”
Draghi is relying on record-low interest rates and unprecedented liquidity to foster a recovery that has so far relied largely on growth in Germany. With momentum there fading, he may now face more pressure to deliver on a commitment to buy asset-backed securities or start quantitative easing if needed.
“The chance of the ECB doing more has gone up,” said Greg Fuzesi, an economist at JP Morgan in London. “But that still raises the question of what form any additional policy easing would take. This remains hard to gauge. Our central case is that the ECB looks through the data.”
Figures today showed the 18-nation currency bloc unexpectedly posted zero growth last quarter as its three biggest economies failed to expand. German gross domestic product fell 0.2 percent, more than forecast, and France stagnated for a second straight quarter. Data last week showed Italy succumbed to its third recession since 2008.
The economy was bolstered by faster growth in smaller nations. Spanish GDP climbed at the quickest pace since 2007, and the Netherlands and Portugal returned to growth. GDP also increased in Belgium, Estonia, Latvia, Austria, Slovakia and Finland.
Professional forecasters revised their 2014 growth projection for the euro area to 1 percent from 1.1 percent and downgraded their inflation outlook for this year and next, according to an ECB survey today. The central bank will publish its own revised staff predictions in September.
“The return to growth and inflation remains elusive, setting the stage for further undershooting of the ECB’s forecasts and ongoing monetary accommodation,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. LLC. “Today’s data may cause the ECB to marginally revise down its September forecasts, but we don’t think it will spur the Governing Council to adopt QE, yet.”
The Governing Council doesn’t typically hold a mid-month meeting in August as officials take vacation and is scheduled next to meet on Sept. 4 in Frankfurt. Policy makers unveiled an historic stimulus package in June that included a negative deposit rate and loans to banks linked to their provision of credit to companies and households. The so-called TLTRO program will start next month and be implemented through the next two years, with its impact expected to take time to materialize.
“The stimulus effect from the June package has yet to show up,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “To me there’s little doubt that the ECB will wait and see unless inflation falls closer to zero.”
Consumer prices rose 0.4 percent in July from a year earlier, the European Union’s statistics office said in a separate report today, confirming a July 31 estimate. That’s the lowest in almost five years and less than a quarter of the ECB’s goal of just under 2 percent.
Still, “it clearly isn’t sensible to do more than has already been put in place,” said Peter Dixon, an economist at Commerzbank AG in London. “There will be pressure, that’s part of the game unfortunately. But Draghi will be able to resist.”
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