ECB Promotes Stimulus Measures Even as Recovery Lessens NeedPaul Gordon
European Central Bank officials are promoting tools to fight deflation just as the region’s recovery makes it less likely they’ll need them.
While ECB President Mario Draghi has pledged to look “with attention” at the effect on price stability of the rising euro and Governing Council member Jens Weidmann says that quantitative easing would be permissible, those are tactical remarks rather than a signal of immediate action, according to banks including UBS AG. Economists say officials are trying to keep markets in check to support economic growth.
Evidence of momentum in the recovery was underlined this week by purchasing manager indexes showing factory and services activity in the first quarter near the strongest in three years. Policy makers entering a one-week quiet period today will have more survey data and inflation figures to consider before their April 3 interest-rate decision.
“Weidmann’s comments, in particular, indicate that the ECB probably has a consensus to take decisive steps including QE if it sees a need from increasing deflationary risks,” said Prakriti Sofat, senior regional economist at Barclays Plc in Singapore. “However, these are not seen as high enough currently.”
Draghi said in a speech in Paris on March 25 that risks to the recovery include subdued prices, in part caused by a stronger euro. The single currency has climbed almost 8 percent against the dollar in the past year, reducing the cost of imported goods and undermining the competitiveness of euro-area exporters. It fell for a third day today after Draghi’s remarks.
“We stand ready to take additional monetary policy measures that ensure our mandate is fulfilled,” he said. “The exchange rate is very important for price stability and it’s very important for growth.”
Weidmann, who also heads Germany’s central bank, said in an interview with Market News International published on March 25 that a negative deposit rate for banks keeping funds at the ECB overnight would be an “appropriate measure” for limiting the euro’s gains.
He also said asset purchases to inject liquidity into the financial system are not “generally out of the question.” Governing Council member Jozef Makuch, the head of Slovakia’s central bank, said the same day that he’d support quantitative easing if necessary.
QE, which is used by the U.S. Federal Reserve and the Bank of England, is a more controversial topic in the euro area, where the ECB is banned from monetary financing of governments. Weidmann said any such program would have to respect that ban and signaled the central bank could buy private assets rather than sovereign bonds.
“Too much has been read into the remarks by Bundesbank President Jens Weidmann -- our firm conviction remains that QE is not coming” said Reinhard Cluse, an economist at UBS in London. “ECB members have started to talk down the euro, and some of them explicitly mentioned negative deposit rates as a potential instrument against euro strength. This is noteworthy. But in our view, it does not mean that negative deposit rates are around the corner.”
The ECB has kept its benchmark interest rate on hold at a record low of 0.25 percent since November. The deposit rate has been at zero since 2012.
Further reports due before the next meeting include euro-area economic confidence, which probably rose this month to the strongest since July 2011, according to a Bloomberg survey of economists. Those data will be published by the European Commission tomorrow, along with a gauge of consumer confidence which may be at the highest level in more than six years.
Final purchasing managers indexes will be released next week, after flash estimates on March 24 showed manufacturing and services activity stayed close to the highest since 2011.
At the same time, inflation of 0.7 percent in February was less than half the ECB’s goal of 2 percent, prompting speculation that officials may need to ease policy to spur price gains. An initial estimate for this month will be released on March 31.
The ECB said today that bank loans to companies and households in the currency bloc shrank for a 22nd month in February, dropping 2.2 percent from a year earlier.
Draghi said after the March 6 policy meeting that the euro-area economy is improving in line with the central bank’s baseline scenario. The ECB forecasts that growth will be 1.2 percent this year, accelerating to 1.8 percent in 2016. It predicts that inflation will climb to 1.7 percent by the final quarter of 2016.
In Paris this week, he said that rising inflation against a backdrop of low interest rates constitutes a de facto easing of monetary policy.
“Certainly ECB policy makers have been out in force in recent days,” said Howard Archer, chief European & U.K. economist at IHS Global Insight in London. “The ECB has also become more vociferous about the euro’s strength and the implications that this could have for inflation. However, the general impression we get from ECB officials’ comments is that they don’t believe circumstances warrant policy action.”