Draghi’s Data Jigsaw Takes Shape as ECB Readies ShowdownScott Hamilton and Kristian Siedenburg
Mario Draghi’s month-long audit of the euro-area economy has entered a critical phase as officials prepare forecasts and data show whether inflation is becoming too scarce for comfort.
With 10 days left for the European Central Bank president to make up his mind before the next policy decision, reports from rising German sentiment today to region-wide statistics at the end of the week are among pieces he can add to the puzzle of the outlook. Figures on Feb. 28 will probably show inflation remained at less than half the ECB’s goal.
On Feb. 6, Draghi cited the need for “more information” to explain why the ECB hadn’t added more stimulus yet, heralding a month of scrutiny on data that have veered between growth outperforming economist forecasts to a deterioration in survey indicators. He repeated yesterday that officials are “ready to take any action,” setting the scene for a showdown next week as they determine if the economy’s prospects are sickly or safe.
“We believe that the doves still have a clear majority” on the ECB’s Governing Council, Citigroup Inc. economists including Guillaume Menuet in London said in a note today. “Given the need to provide maximum stimulus, particularly in the absence of much momentum in private-sector credit flows, high unemployment, muted recovery dynamics and a likely new low” for inflation, “we expect a rate cut in March.”
Inflation in the 18-nation euro area was probably 0.7 percent in February, the median of 40 forecasts in a Bloomberg News survey of economists shows. Data today showed annual price growth at 0.8 percent in January, above the initial estimate.
The February data will be released at the same time as new labor-market figures, which economists forecast will show unemployment stayed at 12 percent, close to a record high.
In Germany, business confidence unexpectedly climbed to the strongest level in 2 1/2 years, according to a report today. The Ifo institute’s index advanced to 111.3 in February from 110.6 in January. Economists predicted a decline to 110.5. Separate data on Feb. 27 will show German inflation eased to the slowest since April, according to a survey of economists.
ECB staff will consider such information as they finish preparing quarterly economic forecasts for next week’s decision. That outlook will for the first time encompass a three-year horizon with inflation and growth estimates for 2016.
“You could potentially see a trigger this week for ECB action,” Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said in a telephone interview. “The inflation numbers could really be the deciding factor.”
The ECB’s debate on whether to act or not centers on the risk of deflation. Executive Board member Benoit Coeure said in an interview with Slovenian newspaper Delo that the euro region is “closer to the area where inflation expectations could be altered and create downside risks to price stability.”
Draghi, speaking yesterday after a Group of 20 meeting in Sydney, also mentioned the ECB’s focus on consumer-price risks.
“We don’t have any evidence of people postponing their expenditure plans with a view to buying the same thing at lower prices, in other words we don’t see what is defined to be deflation,” said Draghi, 66. The ECB “is willing and ready to take any action in case these risks were to gain strength.”
A deterioration of market-based gauges of inflation expectations has added to the ECB’s quandary. The German 5-year breakeven rate fell to 0.82 percentage point today from 0.98 percentage point in mid-January. Professional forecasters surveyed by the ECB lowered their outlook this month, predicting price growth of 1.1 percent in 2014, 1.4 percent in 2015 and 1.7 percent in 2016. The ECB aims to keep inflation just below 2 percent.
Officials preparing for the March 6 decision are discussing how they might act at a time when the ECB’s main interest rate is already at a record-low 0.25 percent. Any further move may need to include a cut in the deposit rate below its current level of zero.
ECB Governing Council member Jens Weidmann, who heads Germany’s Bundesbank, yesterday described that prospect as “uncharted territory.” Speaking to Bloomberg News in Sydney, he signaled more openness to pausing sterilization of the ECB’s now-terminated bond-purchase Securities Markets Program, saying that he “wouldn’t rule out” such a move.
Some data have eased pressure on the ECB to do anything. The economy grew 0.3 percent in the final quarter of 2013, more than economists forecast. While Markit Economics’s factory and services surveys showed a loss of momentum this month, they still signaled expansion.
ECB Governing Council member Ewald Nowotny last week suggested he opposes to action for now, saying that inflation may “self-correct” as the economy improves.
“It’s finely balanced, because some people will say the money markets have calmed, verbal intervention has been sufficient and a small refi-rate cut won’t have that much of an impact,” said James Ashley, an economist at RBC Capital Markets in London. Still, “the past two months of inflation probably are enough for the staff projections to be revised down and it’s probably enough to argue for more action.”