Europe Twin Woes Fester in ECB’s Job-to-Inflation FightCraig Stirling and Kristian Siedenburg
Europe’s twin woes of too little inflation and too many unemployed will dominate data due this week just as officials prepare forecasts backing the rationale for Mario Draghi’s surprise interest-rate cut.
Inflation stayed close to the lowest level in almost four years in November with a reading of 0.8 percent, according to the median prediction of 44 economists polled by Bloomberg News. Data published at the same time on Nov. 29 might also reveal the euro-area jobless rate remained at a record 12.2 percent.
Those reports precede quarterly forecasts that the European Central Bank president will present next week, heralded as an opportunity to help explain the Nov. 7 rate cut to 0.25 percent. Draghi said at the time that the region needs record-low borrowing costs to combat a “prolonged” period of weak inflation and “very high” unemployment, while Governing Council member Ardo Hansson said in a Nov. 22 interview that the central bank’s rate-cut options aren’t yet fully exhausted.
“They’re right that Europe is in line for a period of too little inflation, but not deflation,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London, whose inflation estimate matches the survey median. “They’re going to try to keep the market on high alert that they’ll move if they need to.”
The euro fell 0.4 percent against the dollar today, trading at $1.3507 at 3:41 p.m. in London.
Most economists say that the so-called flash estimate for inflation will show an increase from October’s reading of 0.7 percent, which was the lowest since November 2009. Estimates range from 0.6 percent predicted by David Milleker at Union Investment GmbH in Frankfurt, to 1.1 percent by Matthias Thiel at M.M. Warburg & Co. in Hamburg.
“It is clear that the inflation figure of October was weaker than expected,” ECB Chief Economist Peter Praet told Bloomberg Television on Nov. 19 when asked to explain the rate cut. “That was one of the elements, but not the only element” informing officials’ thinking, he said.
Draghi said last week that the ECB “acted to restore an appropriate safety margin” in line with its price-stability mandate of keeping inflation below, but close to, 2 percent.
“We acted because there was a risk that this security margin above the zero percent level was eroded because of low activity and low inflation pressures,” ECB Executive Board member Benoit Coeure said today at a forum in Tokyo. “If we would see this security buffer further eroded, then we would act again, and we have enough instruments in our tool box to this purpose.”
Coeure said the ECB did not lower the benchmark rate this month because it saw the risk of deflation materializing in the euro area.
Draghi’s predecessor in the job, Jean-Claude Trichet, said the ECB’s decision to cut rates was “a right one.”
“It is perfectly legitimate that central banks are guarding themselves for deflation as well as from inflation,” Trichet told reporters in London on Nov. 21. “I don’t trust there is a real risk, but you have to guard in any case.”
The inflation rate masks considerable divergence across the euro region. In Germany, Europe’s biggest economy, annual consumer prices increased 1.2 percent in October, in Italy inflation was 0.8 percent and in France it was 0.7 percent. In contrast, Greek prices slumped 1.9 percent from a year earlier.
“The biggest core country is taking a different course than the periphery,” said Jens-Oliver Niklasch, a fixed-income strategist at Landesbank Baden-Wuerttemberg in Stuttgart. Even so, he sees inflation back above 1 percent within the next year.
ECB staff predictions in September showed inflation at 1.3 percent in 2014. Next month’s forecast will incorporate the results of their twice-yearly consultation with euro-area central banks. Draghi pledged this month that the outlook will provide a “fuller picture” on just how long officials see insufficient inflation persisting.
The ECB president also said at this month’s decision that unemployment currently “looks like it is stabilizing” though “stabilizing at the top.” He reiterated on Nov. 21 in a speech surveying euro-area monetary and political efforts to foster growth that “for the sake of those who remain unemployed, we have to persevere.”
This week’s jobless data may underline the significance of that mission. Only one economist out of 34 surveyed predicts a drop in the unemployment rate, and two see it increasing to 12.3 percent. Giada Giani at Citigroup Inc. predicts the rate in Draghi’s home country of Italy will reach a record 12.6 percent, more than double the comparable measure for Germany.
With evidence on the euro-zone’s inflation and jobless predicaments published less than a week before the central bank officials’ forecast is presented, the ECB is wondering how it might respond with further action to aid an economy that expanded just 0.1 percent in the third quarter. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate to minus 0.1 percent if more stimulus is needed to ward off deflation.
“We are technically ready” to reduce the deposit rate, ECB’s Hansson said. “We’ve had a tradition of using those 25 basis points so I’d have to look at some analysis of different options. Theoretically, a smaller cut wouldn’t be off the table. Certainly, the bigger the move, the more impact you have.”
For now, economists say the ECB won’t do anything when policy makers meet on Dec. 5. While a majority in a Bloomberg survey say the ECB’s most probable next move will be new liquidity injections such as long-term loans, 77 percent of those see it happening in the first or second quarter of 2014. Just 9 percent see Draghi taking action in December.
“You can’t say that the ECB was wrong in cutting rates, even if it was a somewhat peculiar move on its part” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “In December they won’t do anything, they will just present their updated predictions.”