Draghi Rate Vow Splits Economists as Euro Area ReboundsJeff Black and Andre Tartar
Mario Draghi’s forward guidance on European Central Bank interest rates has split economists down the middle.
Of 31 economists in a Bloomberg monthly survey, 16 said the ECB president’s commitment that official rates would remain at “present or lower levels for an extended period of time” hasn’t been effective. The remainder said it has.
Draghi made the unprecedented vow in July, after the Federal Reserve’s signal that it may start withdrawing U.S. stimulus pushed market rates higher globally. While European borrowing costs initially fell, they have since returned to levels the ECB head called “unwarranted.” That supports the view of some economists that the Frankfurt-based central bank can’t stop rates rising as the 17-nation currency bloc rebounds from its longest-ever recession.
“Bond yields in general across the globe are starting to rise on clear evidence of recovery in the world’s major economies,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “Although the U.S. is more advanced in the recovery than either the euro zone or U.K., and central bankers in Europe are trying to contain market rates, the reality is that bond yields will take their cue from what happens in the U.S.”
Fed Chairman Ben S. Bernanke and his colleagues will decide to trim monthly purchases of Treasuries to $35 billion from $45 billion at this month’s meeting while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a separate Bloomberg survey.
The U.S. economy expanded at an annualized rate of 2.5 percent last quarter, up from an original estimate of 1.7 percent, just as the euro area emerged from six quarters of contraction. U.S. jobless claims declined last week to the lowest level since April 2006.
Economists in the monthly survey, which was conducted from Sept. 6 to Sept. 11, upgraded their outlook for the euro area. The economy will contract 0.5 percent in 2013, compared with last month’s forecast of 0.6 percent, according to the median estimate. The estimate for 2014 was unchanged at an expansion of 1 percent.
The ECB forecast on Sept. 5 that gross domestic product will shrink 0.4 percent this year, compared with a June forecast of 0.6 percent, followed by growth of 1 percent in 2014.
Draghi’s attempt to prevent that renewed optimism from strangling the recovery through a higher cost of borrowing has been only “moderately successful,” he said on Sept. 5 after the ECB held its benchmark rate at a record low of 0.5 percent for a fourth month.
The U.K. sold 10-year gilts at a yield of 2.98 percent today, the highest since June 2011. Germany sold 10-year bunds yesterday at 2.06 percent, the highest in almost two years. The overnight rate that banks expect to charge each other by the ECB’s September 2014 meeting, as measured by Eonia forward contracts, is at 0.25 percent, near the level before Draghi’s forward guidance on July 4.
Some investors in the survey said that rates would have been higher still had Draghi not introduced guidance, and that points to a qualified success.
“In the short term, the forward guidance has been effective given that the bund yields increased at a slower pace than the Treasuries,” said Cyrus De La Rubia, chief economist at HSH Nordbank AG in Hamburg. “In the middle to long term, the ECB has no power whatsoever to stem a U.S. yield increase on the long end of the curve.”
Draghi reiterated in Riga today that money-market rates are “unwarranted,” while saying the guidance has been “very successful” in reducing volatility. He also said the ECB is “not running out of options, not at all.”
Euro-area industrial output shrank more than economists forecast in July as manufacturers struggled to shake off the legacy of the region’s recession. Factory production fell 1.5 percent from June, the European Union’s statistics office in Luxembourg said today. That’s more than the 0.3 percent contraction forecast by economists in a Bloomberg survey. Unemployment held at a record 12.1 percent in July.
“There is a wider perception that Mr. Draghi and most of his colleagues actually want to keep rates low,” said Alastair Winter, chief economist at Daniel Stewart & Co. in London. “Draghi is rightly very worried about growth and unemployment despite the recent outbreak of joy amongst some investors.”
In a sign that the global recovery is uneven, Australia recorded its first back-to-back jobs decline in more than two years. The number of people employed fell 10,800 in August from the previous month, when it dropped a revised 11,400, the statistics bureau said in Sydney today. Unemployment rose to a four-year high of 5.8 percent, from 5.7 percent in July.
Prime Minister-elect Tony Abbott’s coalition won office on Sept. 7 pledging to lower taxes and cut red tape in order to spur the $1.5 trillion economy as a China-led mining investment boom crests. Traders are pricing in a 40 percent chance the Reserve Bank of Australia will cut rates by the end of this year, compared with 38 percent before the release, according to interest-rate swaps data compiled by Bloomberg.
While the ECB still has room to tweak its guidance, which doesn’t specify a time frame or link its rates to economic indicators, that path isn’t necessarily any more successful in containing the market.
Bank of England Governor Mark Carney said today that investors pushing up U.K. borrowing costs are betting that unemployment will fall faster than policy makers predict. The BOE has pledged to keep rates low until unemployment falls to 7 percent. The guidance includes so-called knockouts linked to the bank’s 2 percent inflation goal.
“Draghi’s forward guidance has been only partly or moderately successful as he failed to bring rate-hike expectations down,” said Duncan De Vries, an economist at NIBC Bank NV in The Hague. Even so, he “succeeded in the ECB’s mission to keep short-term rates relatively low and therefore the yield curve steep, despite the vagueness of the guidance and improving economic conditions.”