ECB Rate-Cut Momentum Seen Ebbing as Decision Day Looms

Euro-region economic reports in the past month turned out reassuring enough to convince most economists that Mario Draghi doesn’t need to cut interest rates this week.

With data on growth, inflation and economic sentiment all exceeding estimates, only about a quarter of forecasters in a Bloomberg News survey say the European Central Bank president and colleagues will reduce the benchmark rate from the current record-low 0.25 percent. Policy makers announce their decision in Frankfurt on March 6.

Draghi last week reiterated his stance that the ECB remains “alert” to risks from low inflation and stands “ready to act.” Officials now have new information on the economy that they sought in February when they kept rates on hold, along with quarterly forecasts prepared by staff.

“The pressure felt a month ago that might have led the ECB to be very aggressive this week has somewhat diminished,” said Jacques Cailloux, chief European economist at Nomura International Plc in London. “Business-cycle information is supporting the story of a modest recovery and inflation is broadly tracking the ECB’s December forecast.”

Inflation Forecast

Data in the past week showed inflation held at 0.8 percent so far this year, exceeding both an initial estimate for January and economist forecasts for February. It remains at less than half the 2 percent level the ECB uses to define price stability. Officials predicted at the end of 2013 that inflation will average 1.1 percent this year.

While International Monetary Fund Managing Director Christine Lagarde said today in Bilbao, Spain, that broad-based deflation “is not in the cards” for the euro area, it remains a risk.

“We range that risk at about 15 to 20 percent, which is why we recommend that central bankers guard against it and have available and ready the tools that could respond to that in terms of monetary policy, which means clearly in the first place the interest rate,” she said.

Some growth indicators have shown improvement in the past month. Gross domestic product climbed 0.3 percent in the fourth quarter, exceeding economist estimates. Euro-area economic confidence unexpectedly rose in February, while in Germany, business confidence reached the strongest level in 2 1/2 years.

Purchasing Managers

Market Economics revised higher its factory index for the euro region today. The gauge, taken from a survey of purchasing managers in February, was at 53.2 instead of a previously estimated 53, after responses in France signaled that manufacturing there has almost stopped contracting.

The euro was 0.2 percent lower today, trading at $1.3769 as of 2:26 p.m. in London. It reached its highest for 2014 on Feb. 28 after the release of inflation data.

ECB Governing Council member Gaston Reinesch told Germany’s Boersen-Zeitung in an interview published last week that “hard data” suggest that the euro region’s economic recovery “seems to be gaining momentum slowly.”

Draghi put investors on notice last month for potential stimulus and repeated last week that the ECB remains “alert as to whether any indication on further downside risks to price stability emerge.”

Testimony Today

Over the past five years, the ECB has “continued to take the necessary measures with a view to maintaining price stability in the euro area,” Draghi told lawmakers at the European Parliament in Brussels today. According to the normal monthly procedure, his Executive Board meets tomorrow in Frankfurt and may consider proposals for the wider Governing Council, whose 24 members then dine together on the eve of their decision.

“The data flow hasn’t deteriorated enough to justify action,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “There is no clear sign of improvement in the monetary and credit situation but inflation hasn’t really changed and economic sentiment indicators and GDP data do suggest a strengthening of economic activity.”

In the Bloomberg survey of 54 economists, 14 predict a rate cut. Of those, eight see a 15-basis point move to 0.1 percent, including forecasters at Commerzbank AG and Morgan Stanley. Economists at BNP Paribas SA, Credit Suisse Group AG and four others predict a 10 basis-point cut to 0.15 percent. Only one of 40 economists -- Michael Schubert at Commerzbank -- predicts the deposit rate will fall to minus 0.1 percent from zero.

Bank Lending

Governing Council member Bostjan Jazbec said on Feb. 27 that it’s unclear if cutting interest rates would be the right fix to tackle weak credit in the euro area. “There is a bit of decoupling from business cycles and financial cycles, and how you approach it is a million-dollar question,” he said.

Lending to companies and households in the region contracted for a 21st month in January, falling 2.2 percent from a year earlier after shrinking 2.3 percent in December. Unemployment held at 12 percent in January, just shy of the euro-era record of 12.1 percent last seen in September.

Should policy makers decide that some action is needed, other options might include issuing fresh long-term loans to banks or ending the absorption of liquidity created by the ECB’s crisis-era bond purchases.

Governing Council member Jens Weidmann, who heads Germany’s Bundesbank, has indicated support for suspending sterilization of historic bond purchases. Halting the liquidity drain would add about 175 billion euros ($241 billion) to the euro-area financial system.

New Forecasts

Officials will use updated economic projections to help inform them on whether such an option is needed. Published at the March 6 decision, the forecasts take account of a horizon through 2016 for the first time. Economists see inflation of 1.6 percent for that year, according to the median prediction in a Bloomberg News survey published on Feb. 17.

While the ECB has started to draft trial minutes of its Governing Council meetings, it isn’t ready to unveil the measure after this week’s meeting, according to two euro-region central-bank officials, who asked not to be identified because talks on the are private.

“The new staff macroeconomic forecasts are likely to play a crucial role,” Reinhard Cluse, chief European economist at UBS AG in London, wrote in a note on Feb. 28. “If the ECB were to revise downwards its inflation forecasts for 2014 and 2015 or if it were to roll out quite a low inflation forecast for 2016, then this might well trigger further easing.”

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